On Friday, Peregrine Pharmaceuticals (NASDAQ:PPHM) and Cell Therapeutics (NASDAQ:CTIC) both popped: 47% and 30% respectively. Peregrine's pop is based on promising Phase II news. Cell Therapeutics' pop appears to be based on product development events and Pixuvri's launch. But I think I have found another biotech that is about to yield even higher returns. I am thinking of a firm whose CEO recently told its investors that their company expects to be "cash flow positive in 2012." That firm is Astex Pharmaceuticals (NASDAQ:ASTX) and that comment was made at last Thursday's Stifel Nicolaus Healthcare Conference (listen here).
Quite frankly, Astex is miles ahead of Peregrine and most definitely Cell Therapeutics, but I will leave it to SA readers to draw their own conclusion since investors often like to diversify into more than one stock. Peregrine, Cell Therapeutics and Astex could be an interesting mix, though I would personally substitute Antares Pharma (NASDAQ:ATRS) for Cell Therapeutics.
Right now Astex is very busy telling its oncology story. Similar to Dendreon's Provenge (NASDAQ:DNDN) and Cel-Sci's Multikine (NYSEMKT:CVM), Astex is also exploring immunotherapy drugs and combination chemistries. This morning the company announced the launch of AT13387's Phase I-II clinical trial for prostate cancer. Last Friday, a presentation by Astex was made at BioCentury and Thomson Reuters' NewsMakers in the Biotech Industry (view here). Today, a presentation will be made by Astex at the Rodman & Renshaw Global Investment Conference (listen here).
Last Thursday, Astex also announced a new collaboration with Cancer Research Technology and The Institute of Cancer Research, London, United Kingdom:
... a collaboration to discover and develop drug candidates targeting an undisclosed epigenetic target in a blood cancer with high unmet medical need. The collaboration combines Astex's world-renowned fragment-based drug discovery platform and epigenetic* drug development experience with the expertise in blood cancer biology at The Institute of Cancer Research (ICR) and proven success in drug discovery at the Cancer Research UK Cancer Therapeutics Unit at the ICR.
This news came as a pleasant surprise since investors are waiting for Dacogen's approval in Europe (See: Bulls Keep Knocking On Astex's Door) and it highlights Astex's oncology depth and expertise. In this article, I want to explain three fundamental reasons I've discovered for why Astex is among a very small minority of crème de la crème, low-priced biotechs.
1. Intellectual Property
Investors need to learn the value of studying a company's most fundamental variable: intellectual property. Normally, much of this remains hidden, but searching the patent files is a fruitful means to peel back what the company has been doing and what it may be doing. In Astex's case, for a small firm I was impressed by the number of United States oncology patents the company has been granted in the last two years.
- Imidazo[4, 5-B]pyridin-2-one and oxazolo[4, 5-B] pyridin-2-one compounds and analogs thereof as cancer therapeutic compounds
- Benzimidazole derivatives and their use as protein kinase inhibitors
- 4-(2,6-dichloro-benzoylamino)-1H-pyrazole-3-carboxylic acid piperidin-4-ylamide acid addition salts as kinase inhibitors
- Bicyclic heterocyclic compounds as protein tyrosine kinase inhibitors
- Bicyclic heterocyclic compounds as protein tyrosine kinase inhibitors (distinguished from previous patent)
- 3,4-disubstituted 1H-pyrazole compounds and their use as cyclin dependent kinase and glycogen synthase kinase-3 modulators
- Hydroxybenzamide derivatives and their use as inhibitors of HSP90
- Dihydroxyphenyl isoindolylmethanones
- Pyrazole compounds that modulate the activity of CDK, GSK and aurora kinases
- FGFR pharmacophore compounds
- Pyrazole derivatives as protein kinase modulators
While patents may be very technical and hard to read, Astex's patent activity is above average for its size. In the U.S. alone, Astex was granted 11 patents and that doesn't include Europe, WIPO's, and U.S. patent applications (Go here: I counted 30!). Given that I am only representing two years of intellectual property, an investor can see that Astex has the validated depth and breath behind its research and development program. Therefore, regarding its intellectual property, Astex is fundamentally sound.
2. Clinical Research Activity
Biotech companies can boast a very large pipeline, but then you may find out that they don't even have one drug candidate registered at ClinicalTrials.gov. Many biotech firms may be stuck in preclinical trials or perhaps have only one clinical trial that has stretch their budget. In contrast, well-financed Astex has six registered ongoing and/or pending launch clinical trials: five recruiting and one not yet recruiting.
Recruiting (1-5) and Not-Yet-Recruiting (6):
- NCT01294202: "The purpose of this study is to investigate if an investigational drug called AT13387 is active against Gastrointestinal Stromal Tumor (GIST) that is resistant to other treatments, and to understand more about the safety of AT13387."
- NCT01261312: "A Phase I-II, Dose Escalation, Multicenter Study of Two Subcutaneous Regimens of SGI-110, a DNA Hypomethylating Agent, in Subjects With Intermediate or High-Risk Myelodysplastic Syndromes (MDS) or Acute Myelogenous Leukemia (AML)."
- NCT01183949: "The purpose of this study is to determine whether AT7519M alone or AT7519M plus bortezomib are effective treatments in patients with previously treated multiple myeloma."
- NCT01357395: "The purpose of the study is to evaluate the safety and potential benefit of combination amuvatinib with standard of care chemotherapy treatment (platinum and etoposide) in small cell lung cancer (SCLC) subjects."
- NCT01627054: "The purpose of this study is to find out what effects a new drug AT7519M has on chronic lymphocytic leukemia."
- NCT01652144: "The purpose of this study is to find out what effects a new drug AT7519M has on mantle cell lymphoma."
Many small biotech companies boast of multiple shots on goal, but their clinical trial activity looks more like kicking one ball at a time since they are cash-strapped. Astex is not cash-strapped with more than $120M and zero debt. Astex also isn't kicking one ball at a time, but is firing multiple shots on goal (See: Astex pipeline). I conclude that mitigates an investor's risk even though any drug candidate on any given day can fail. Nevertheless, Astex offers a savvy investor multiple opportunities.
In addition, Astex has seven early stage research programs:
- Three programs in "Discovery" with Cancer Research Technology (just announced), GlaxoSmithKline (NYSE:GSK), and Janssen/Johnson & Johnson (NYSE:JNJ).
- Two programs in "Preclinical" with AstraZeneca (NYSE:AZN) and Janssen.
- Two programs in '"Phase I" with Novartis (NYSE:NVS) and AstraZeneca.
An impressive five "Phase II" oncology projects, one which is partnered with Novartis and four of which the company has not partnered meaning these are fully owned assets. Upon success, that is a strong case for near-term value in the next 2-5 years. For example, Astex has prioritized (See: slide #6) SGI110 for completing Phase III by 2015 and AT13387-HSP90 for late stage Phase II by 2015.
Finally, Astex has Dacogen, its revenue-generating drug in the market that the company reports will earn $70M in 2012 (10% increase over 2011) and along with Eisai (OTC:ESALF) is waiting to receive approval from the European Medicinces Agency. If approved in Europe, Dacogen will receive 10-year market orphan drug exclusivity and because of its chemical complexity, even though its U.S. patent runs out in 2013, it will be very hard to copy so its sales volume via royalties should approach $100M one to two years out (These are estimates based on the addition of 18,000 total patients/market target in Europe). The company also reports $17.5M milestone payments outstanding in partnership with Eisai and Janssen. Dacogen sales are not going backwards, it is going forward and even more so if it is approved in Europe (a decision that is expected before the end of September 2012).
Therefore, I conclude that Astex has a very robust clinical trial program with its depth of projects and its breath of partnerships and wholly owned assets. It is fundamentally sound.
3. Financial Stability
At the Stifel Nicolaus conference (listen here), CEO Manuso told investors:
We have a very strong balance sheet ... end of the second quarter about $120M cash equivalents... total assets of about $270M ... shareholders' equity about $228M... fully diluted basis about 109M ... Dacogen will bring in about $70M... a total about $77M ... $7M cash flow positive ...
Astex is financially stable and unlike most low-flying biotechs, it is highly unlikely that it is going to run out of money any time soon. I also disagree that Dacogen's sales will decrease and if it is approved in Europe this month, I do see the company's revenues heading towards $100M/year. On Dacogen's approval in Europe, the stock could break $5-6/share as momentum continues to build.
What does surprise me about Astex is its low daily volume: 743,494 average volume (3 mth/avg). However, recently it has been increasing suggesting that interest in this stock is on the rise. As is often the case with low-flying biotechs, they often go unnoticed because of their high-volatility and low share price. Nevertheless, there are signs supported by an analysis of the long-term chart that Astex is on an exponential rise.
The fact that Astex will be cash-flow positive in 2012 suggests to me that at ~$3.16/share, the strong balance sheet, the depth of intellectual property, and the breath of clinical trials makes this a great investment opportunity for traders looking for a crème de la crème biotech stock. Given the general uncertainty of the biotech market and while Astex may see its disappointments as any biotechs do, I conclude its successes will outweigh its failures. After all, how many biotechs are under $4/share that are: debt free, cash-flow positive, revenue-generating, and have multiple shots on goal with sales growth on the rise?
On Dacogen approval in Europe, Astex's stock could rocket into the $5-6/share price range because this company's core fundamentals are so strong. Astex has a financial base Cell Therapeutics might wish it having executing a reverse-split that diluted long-term shareholders. Astex alsp has a marketed drug (Dacogen) while Peregrine highlights promising Phase II data. In the final analysis, should the EMA approve Dacogen in Europe, Astex's stock price may very well jump much higher than last Friday's foothills of both Peregrine and Cell Therapeutics. Of course the risk is Dacogen's approval by the EMA, so investors should never risk more than they are willing to lose. That stated, I still think Astex has an excellent shot at receiving approval, but the real key here is grasping the solid fundamental basis of Astex as a cash-flow positive biotech corporation.