ChemoCentryx: Reviving Vercirnon

| About: ChemoCentryx (CCXI)
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Chemocentryx (CCXI) "ChemoCentryx is a biopharmaceutical company focused on discovering, developing and commercializing orally-administered therapeutics to treat autoimmune diseases, inflammatory disorders and cancer. The Company targets the chemokine system, a network of molecules, including chemokine ligands and their associated receptors, as well as related chemo-attractant receptors, all of which are known to drive inflammation."

Introduction

It's been almost two months since my last article on smallcap, ChemoCentryx, posted to Seeking Alpha, and my short term expectations of an immediate CCXI rebound proved inaccurate; to the contrary, the stock suffered another hit, and then gradually declined to the lower 5's. Despite stock performance, I believe the fundamental reasons for long term hope remain valid, and recent indicators support that belief. Recent indicators suggest ChemoCentryx has something favorable up its sleeve. It is my intent with this article to briefly review the background & structural strengths of the ChemoCentryx system, and then to explain the favorable indicators.

Recent Background

The news which condemned CCXI to fall from great heights was the failure of Crohn's disease drug candidate, Vercirnon to meet the primary endpoint of a Phase 3 study conducted by Glaxo Smith Kline. This announcement was followed by even more disheartening news: Although ChemoCentryx drug candidate CCX140-B for Type 2 Diabetes met its Phase 2 endpoint, it did not live up to hopes. The combination of these two announcements led to a massive 2-month drop in CCXI, from above $14/share to lows near $5.

In response to the failure of Vercirnon to meet its primary Phase 3 endpoint, Glaxo Smith Kline returned all Vercirnon rights to ChemoCentryx. Since that time, ChemoCentryx has announced its intention to proceed with Phase 3 trials, independent of GSK.

ChemoCentryx Strengths

My last article reviewed some general strengths of the ChemoCentryx process, which included an automated drug candidate selection process, a substantial candidate pipeline, and the candle of hope that Vercirnon is still a valid drug candidate. These strengths remain valid, and one of them is looking more reasonable than it did before, namely hope for Crohn's treatment, Vercirnon.

Favorable Indicator: Institutional Investment by BvF Partners

On October 10, 2013, it was announced that ChemoCentryx insider & major shareholder, BvF Partners acquired an additional 1,289,354 shares of CCXI, for a total outlay of $6,885,150.36. That is a significant vote of confidence by a well-informed insider. What is it they know? Although there is no announcement to this effect, I believe it could be related to expectations of reviving Vercirnon.

Favorable Indicator: Reviving Vercirnon

ChemoCentryx's decision to proceed with Vercirnon Phase 3 testing indicates the company might have discovered a flaw in the methodology behind the Glaxo Smith Kline study. The original GSK Phase 3 results clearly indicated there was an adverse dose-related difference in patient's symptoms:

GSK: "The rates of serious adverse events and withdrawals due to adverse events were similar among the treatment groups, but there was a trend for dose-dependent increases in overall adverse event rates."

[italics added]

This news certainly sounds disheartening, if one believes the GSK Phase 3 results; but do those results reflect the truth? What evidence do we have that ChemoCentryx's decision to proceed with Phase 3 trials is valid? The Phase 2 study showed Vercirnon was safe and effective in fighting Crohn's symptoms, and without negative side effects:

ChemoCentryx: "We have completed nine clinical trials with vercirnon in a total of 785 subjects, including five Phase I clinical trials in a total of 151 subjects, one Thorough QT study in 57 subjects demonstrating cardiovascular safety, two Phase II clinical trials in 510 patients with Crohn's disease and one Phase II clinical trial in 67 patients with celiac disease. The largest of these Phase II clinical trials, PROTECT-1, was conducted in 436 patients with moderate-to-severe Crohn's disease. Results from this clinical trial indicated that vercirnon was effective in inducing a clinical response over a 12-week treatment period in these patients. Furthermore, the results indicated that vercirnon was also effective in maintaining clinical remission over a 36-week treatment period. Vercirnon was safe and well tolerated in all clinical trials completed to date. "

[italics added]

As you can see, there was a major difference between Phase 2 and Phase 3 results. The difference demands an explanation. Drugs don't just go from being effective, without negative side effects, to being ineffective, and with negative side effects. Being of a scientific mindset, I fully expect to see Phase 3 results which closely resemble those of Phase 2, perhaps with some additional insights. When the results are grossly off from anything seen before, it's time to start an inquiry about methodology. From the results we see, I must believe there was a major flaw in the GSK Phase 3 study, because its results are completely unlike those of Phase 2. The disparity smacks of faulty drug administration: perhaps dose-related. Phase 1 and 2 showed Vercirnon was "well tolerated in all clinical trials" and "was effective in inducing a clinical response". Therefore, I find it difficult to believe GSK Phase 3 used Vercirnon in the same manner it was used in Phase 1 & 2, and I view Vercirnon as having all the potential it did before the GSK Pase 3.

What the Faulty GSK Study Could Mean for CCXI

These insights are important for CCXI investors, because the evidence strongly indicates GSK did not give Vercirnon a fair trial. The inconsistent results should make you certain of that. Furthermore, thanks to ChemoCentryx's decision to go it alone, Vercirnon is getting a second chance to replicate the favorable results it already achieved in Phase 2. If Vercirnon is vindicated [which is every bit as likely as it was before GSK announced], CCXI will immediately have substantially more value than it presently trades. Recall that GSK's negative announcement threw the stock down from $14 towards $5. Had GSK announced favorably, CCXI would have increased well beyond $14, and that is where it will be, should Vercirnon pass the new Phase 3 trials, given GSK has returned all rights to Vercirnon back to ChemoCentryx, rendering ChemoCentryx the sole equity holder in the asset. Therefore, a Vercirnon success would be even better for Chemocentryx than it would have been, before.

As a CCXI shareholder, I'm waiting for real world events to activate the logic behind that insight. Should it come to pass, my expectation is to see CCXI trading between $18 and $30, where it would have traded, had GSK announced favorably.

One should now ask what would happen if Vercirnon failed its second Phase 3. Based on GSK's bad press, and the 2 month dive, the market already assumes Vercirnon does not work. Subsequent bad Vercirnon press wouldn't have much effect on CCXI. Therefore, I view the risk:reward analysis on CCXI to be quite good. Its present trade value is wrapped up in ChemoCentryx's broad pipeline, and rapid drug candidate development capabilities. The high alpha wildcard for this smallcap is Vercirnon, and, as I've shown, there are good reasons to keep hope.

Two months ago, it would have cost investors $14/share to wait and see whether Vercirnon would pass. Now it only costs $5/share, and it's every bit as likely as it was, before, because the GSK study was faulty, and of that I'm certain; the new Phase 3 has all the potential we originally hoped for.

Conclusion

To review the major points I just covered: Institutional insider, BvF Partners, seems aware of something which triggered a $7 million purchase of CCXI, just 2 weeks ago. GSK Phase 3 study results were not consistent with anything preceeding them, which renders GSK's conclusions highly suspect; yet those conclusions drove CCXI towards $5, from $14. GSK's conclusions will likely be overturned; the likelihood of Vercirnon passing the new Phase 3 is still every bit as good as it was before GSK issued its announcement. Should Vercirnon be proven valid, it would move CCXI from the $5 zone well beyond its prior $14 price level; even moreso because ChemoCentryx now has full Vercirnon equity. CCXI is trading near an all-time-low, which reduces the risk of downside for new investors, while maximizing upside for longs. For all these reasons, I remain a CCXI shareholder, and I believe smallcap, ChemoCentryx, is a superb investment, with high alpha potential of 500%, or more, pending favorable Vercirnon results; furthermore, there is a safety net built into the fact that the market already assumes Vercirnon does not work. I conclude that the risk:reward scenarios for CCXI longs are quite good.

I'd like to wrap this up with the words of Thomas J. Schall, PhD, President and Chief Executive Officer ChemoCentryx, on the announcement that his company was receiving full rights to Vercirnon:

Thomas J. Schall, PhD, President and Chief Executive Officer ChemoCentryx: "We are pleased to have a response from GSK which gives us certainty that vercirnon now returns entirely to ChemoCentryx, and which confers to us many degrees of freedom in deciding this valuable asset's forward path."

Disclosure: I am long CCXI. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I might be adding to my CCXI long position, over the next month.