Curis Inc. (CRIS) is a company operating within the biotechnology industry that according to Bloomberg gears its focus to "developing therapeutics for the regeneration and restoration of human tissues and organs." In this article, I will outline four key reasons in support of investing in CRIS and within each reason you will find multiple figures with supporting details.
Reason 1: Their Business Model: Expanding Fast to Match the Need
What is Curis?
"Curis Inc. is a drug development company that is committed to leveraging its innovative signaling pathway drug technologies to seek to create new targeted small molecule drug candidates for cancer. Curis is building upon its previous experiences in targeting signaling pathways, including in the Hedgehog pathway, in its effort to develop proprietary targeted cancer programs."
Hedgehog signaling pathway, A general overview
"The Hedgehog gene was identified in genetic screens aimed to provide an understanding of body segmentation in Drosophila (Nusslein-Volhard et al., 1980). Loss of the secreted Hedgehog signaling protein was found to cause Drosophila embryos to develop as spiny balls reminiscent of hedgehogs. Hedgehog signaling plays a role in many processes during embryonic development and remains active in the adult where it is involved in the maintenance of stem cell populations. Here, aberrant Hedgehog signaling in some cases can lead to certain forms of cancer." Below is a figure outlining how the hedgehog signaling pathway works."
Figure 1: Hedgehog signaling pathway
In figure 1 on the left, the "Ptc represses Smo, preventing the activation of Hedgehog signaling via proteolytic cleavage of Ci. Cleavage results in a repressor form of Ci, which enters the nucleus and inhibits Hedgehog target gene expression." On the right you will see that "In the presence of Hedgehog (HH) the inhibitory effects of Ptc on Smo are relieved. Smo becomes phosphorylated by PKA and CK1 and PKA, CK1 and GSK3 are released from Cos2, preventing the cleavage of Ci. Full length Ci is no longer inhibited by Sufu and enters the nucleus to induce the transcription of Hedgehog target genes." For further detail on this process, please refer to the link I provided in the paragraph above Figure 1.
Recent Advances With Clinical Trials
CRIS has several wholly-owned programs that are aimed at focusing on small molecule inhibitors targeting cancer network disruption. One of these wholly-owned programs is CUDC-101, and recently on October 2nd CRIS announced that Phase I of their clinical trial for CUDC-101 has been entered, "Curis Announces Dosing of First Patient in Phase I Clinical Trial". It is anticipated that the completion of Phase I for CUDC-101 will be completed by the end of 2012. This will allow for initiation of phase II to start towards the beginning of 2013. Estimates show that there are roughly over 45,000 new cases of head and neck squamous cell carcinoma in the United States on an annual basis.
Reason 2: Marketable Product With Augmenting Demand
Skin cancer is evidently on the rise, it is one of the fastest spreading cancers across the United States. In the US alone there are approximately over two million new cases each year of non-melanoma skin cancer, and that number has progressively been increasing for years and is continuing to do so. CRIS' existing product and lead drug called Erivedge, which was approved by the FDA in January of this year. The drug is specifically targeted for adults with Advanced Basal Cell Carcinoma. Advanced Basal Cell Carcinoma, BCC for short, is a type of skin cancer that is non-melanoma, and it is the most common form of cancer in the United States today. It was not until Erivedge, where patients with advancing cases of BCC were able to have access to a FDA approved drug for treatment of this extreme cancer. Prior to release, patients would have had no choice other than surgery, radiation, or chemo, however none of which were dramatically effective by any means. And currently, there are no competing products existing in the market place.
Given the size of the United States, as well as the extensive amount of new cases of cancer developing each year there is a high potential for this drug to have continued success. In addition, Erivedge is currently in the process of being reviewed for approval in the European Medicine Agency as well as up for approval in the following countries: Australia, Canada, Israel, Mexico, and Switzerland. Acquiring approval for their drug in these countries has not been factored into my valuation analysis down below, however would augment market value per share tremendously.
Reason 3: Historical Performance Is Supportive
Figure 2: CRIS Price Graph
As you will see in the graph above retrieved from FinViz, CRIS is currently trading roughly around $4 a share, slightly above their seven month support line. With approximately 79.62 million shares outstanding their sitting at a market cap of a nearly $323 million.
Figure 3: Benchmark and Peer Comparison
Figure 3 is a graph retrieved from YCharts depicting CRIS outperforming the S&P over the past three years. See figure 4 below for a continuation with statistics from their monthly holding period returns for the past four years (including distributions).
Reason 4: A Nice Value Play, Yet Only Moderate Risk Exposure
CRIS presents a nice opportunity for multiple kinds of investors, ones seeking aggressive growth potential as well as those seeking securities with attractive valuation. However, with either approach it is first important to know the risks involved. To analyze the firm specific risk of CRIS held in isolation I used the monthly holding period returns (including distributions) for the past four years and then used the same data of the S&P 500 to serve as a benchmark for comparison. Below in figure 4, you will see the output of my calculations.
Figure 4: Risk Metrics
In the figure above, you will see over the past four years CRIS yielded an average return of about 5.87%, while the S&P yielded a slightly negative return. One thing worth noting is the standard deviation. While the S&P did produce a negative return its standard deviation was only 5.96%, high variation for an index at the time, but significantly less than CRIS. The standard deviation for CRIS during the same period was roughly 22%, which shows that the returns have historically been volatile. In addition, Kurtosis levels are moderate and not considerable enough to indicate the probability of any extreme abnormal returns. It is fair to conclude that CRIS exposes an investor to a moderate level of risk.
The Corporation Valuation Model Complies With Expected Growth
Figure 5: Corporate Valuation Model
The inputs in this model have been altered based on current operations and expected growth into FY 2013, note this is not the current intrinsic value per share. However, this estimate is conservative if operations and expansion continues to the end of next year. As you will see in figure 5 above, my end result of the model was an intrinsic share price of $7.31. This calculation is an estimate specific for FY 2013. This calculation was derived by projecting current free cash flows forward, then using a constant growth model to approximate their value of operations. In the growth model, the weighted average cost of capital that was used was an average. The weighted average cost of capital as well as the division of the number of shares outstanding in the model reflects the anticipated buy back of approximately 5% of the shares outstanding.
In addition, this model does not value in Phase I of clinical trials. Trials conducted at such an early stage I concluded are not sufficient enough to factor in to intrinsic share value. Yet, the growth rates do depict market growth and potential of CRIS's current product. Success achieved in clinical trials as well as product approval in new countries will provide an even potential higher upside than I accounted for. My estimated intrinsic share price is conservative.
Overall, CRIS engages in a massive industry with a target market that is growing indefinitely. The number of individuals with skin cancer is increasing every day, and individuals want results. They want a product they can rely on. CRIS has the potential to fill that need. They have an existing product currently on the market in the US along with multiple studies and ongoing clinical trials. In addition, CRIS' product is in the process of being reviewed for approval in other countries around the globe. Historical performance has displayed moderate levels of risk, and returns have been slightly volatile, but CRIS has the potential to provide investors with a high upside and should be given consideration.
Sources: All graphs, company fundamentals, and statistical and financial market data was retrieved from FinViz, YCharts, Yahoo Finance, Curis's Company Website, and Bloomberg Market Data.