I have long planned to write my opinion on Cellceutix (CTIX), which I consider one of the most exciting oncology-focused biotech companies. Despite the usual risks of an early-stage biotech, I find their p53 activator compound Kevetrin one of the most interesting things to follow.
However, when Cellceutix acquired PolyMedix assets from bankruptcy in September 2013, I was not sure what to make out of it. A biotech company developing cancer drugs is buying an antibiotic company's assets? I must admit that my impression was not positive at first. I prefer when an early-stage biotech company stays focused on the key compounds. After some time, I analyzed the acquisition in more depth and started developing a sneaking suspicion that it was one of the smartest moves I have seen in a long time.
Why I am convinced this was a smart move
Until this point, despite a very interesting science, Cellceutix was simply an early-stage biotech, which has not even finished a Phase I trial yet. However, by acquisition of PolyMedix assets, Cellceutix suddenly became a company that owns a drug with very positive Phase II clinical trial results. The compound PMX-30063 is a first-in-class defensin-mimetic antibiotic and a potential blockbuster in the growing market of antibiotic-resistant bacteria therapeutics. In the clinical trial, the drug was safe, well tolerated and effective in patients with acute bacterial skin infections. Not only that the drug hit the endpoints, but it also seemed to perform better than the control arm in the trial treated by clinically approved antibiotic Cubicin, developed by Cubist (CBST). The fall of PolyMedix had nothing to do with Brilacidin and it shows that even a company with a great drug can fail if not properly managed. Cellceutix is currently developing Brilacidin for the treatment of oral mucositis and skin infections. These clinical indications are not completely off the Cellceutix's focus, because oral mucositis is a serious and debilitating complication of current anti-cancer therapies and the company has a strong pipeline in dermatology with their psoriasis compound.
What does this mean for valuation of Cellceutix?
In early 2012, PolyMedix was valued ~$220 mil. Paradoxically, the acquisition had a very little impact on the market cap of Cellceutix, which is still irrationally valued at ~$180 mil. It seems that the market values the deal less than $0 since Cellceutix shares trade lower than before the deal and lower than the value of PolyMedix without any negative data from Cellceutix presented! Let's take a look at the potential valuation of Cellceutix considering only the impact of the PolyMedix's assets and forgetting the psoriasis and cancer pipeline for a moment. Let's just imagine that Cellceutix is a company with a promising novel antibiotic, which has successfully completed a Phase II clinical trial and let's is try to establish the proper value of this acquisition.
There is no perfect way how to establish the value of a biotech company without any revenues. I will make several comparisons and assumptions and I will leave for the discussion whether somebody else reached a better conclusion.
Clinical trial-based comparison
I do not have convenient data on any early-stage biotech company with a Phase I-II antibiotic results available, so I will use other biotech companies for this comparison. Two companies, which recently successfully completed Phase I clinical trials in cancer are Epizyme (NASDAQ:EPZM) and Geron (NASDAQ:GERN) and are valued at ~$990 mil and ~$720 mil, respectively. This value is based solely on a single compound Phase I results and the pipeline expectations. However, all what a Phase I trial has to show is a lack of toxicity and some clinical effect. Although both companies have shown very impressive clinical effect, the evidence from a Phase I is scientifically significantly lower than from a Phase II clinical trial. Brilacidin was tested in a randomized Phase II clinical trial and effects were compared to another effective drug, Cubicin. Furthermore, both Epizyme and Geron trials were small and each evaluated approximately 20 patients, who received the drug. However, the Brilacidin trial had 160 patients in the Brilacidin-treated cohorts and 55 patients in the control arm. Again, significantly stronger scientific evidence in respect to potential side effects and clinical efficacy. A successful Phase II clinical trial alone justifies a value of Cellceutix significantly above the current level of $180 mil.
Potential market valuation
You may argue that cancer drugs are more expensive and this justifies high valuation of cancer focused biotech companies after a Phase I trial alone. But keep in mind, that both Epizyme and Geron have potential markets in the range of 5000-20000 patients/year at most. However, skin infections and antibiotic-resistant bacteria for which Brilacidin was developed is a 20 mil. patients/year and $17 bil./year market in U.S. alone. Brilacidin can also be used for treatment of oral mucositis, which affects 450000 cancer patients per year. This is an amazing deal considering that Cellceutix acquired a potential blockbuster for these markets for a price of $2.1 million in cash and 1.4 million of Cellceutix shares only.
Antibiotic peer comparison
Brilacidin was compared with Cubicin in the clinical trial. Therefore Cubist presents the most logical comparison what could Cellceutix potentially be worth if Brilacidin gets approved by FDA. I would argue that Cubist and Cellceutix are not necessarily competing for the same patient. As I presented above, the market is large. Just like in the clinical practice now, some bacterial strains will respond better to one and some will respond better to the other antibiotic. Keep in mind, we are not talking about a regular antibiotic prescribed by a primary care physician based on their preference or a company marketing. These are severe infections and physicians will choose the antibiotic based on the sensitivity of the bacteria. Therefore both Cubicin and Brilacidin can be successful in the market. Cubist is currently valued at $5.5 bil. You may argue that Cubist is a more advanced company. In addition to Cubicin it also has Dificid and Entereg approved for clinical use. However, if you take a close look at Cubist's financial results for Q4 2013, you can see that Cubicin contributes almost $250 mil. to the total revenues of ~$300 mil. The 2014 revenue guidance for Cubicin alone is $970-$1,275 mil. This makes Cellceutix look ridiculously undervalued at the current price. Even if Brilacidin is able to achieve only 50% of these sales in 3-5 years from now, it will value Cellceutix at ~$2 bil., for Brilacidin business alone. This represents ~10x upside from the current value within 3-5 years. The risk is relatively decreased and the timeline is not unreasonable considering that we already know from the Phase II trial that the drug is not toxic and it works well if not better in comparison with Cubicin.
What does Cellceutix need to do now?
I think investors who follow Cellceutix are so focused on the cancer/psoriasis pipeline, that they completely overlooked the sudden value added to their shares by this acquisition. I must admit it also took me a significant amount of time to wrap my head around this deal. Mostly because I am not so focused on the antibiotic biotechnology. I cannot blame management for this since they were very open how great the deal is.
In my opinion, if Cellceutix makes two crucial things to happen, the stock will go sky-high.
First is finding a partner. I believe that Brilacidin story is so intriguing that it should make a partnership with a Big Pharma company feasible. A big player with a strong antibiotic business would make the best partner for Cellceutix for this project. Another elegant option would be a partnership directly with Cubist. As I said, I do not think that Cubicin and Brilacidin are competitors in the antibiotic market. They have a different structure and mechanism of action and likely different responders among bacterial strains. Cubist already has a strong network and would save Cellceutix developing an antibiotic sales force.
The second thing is moving the stock to a higher exchange. There has been a talk from the management about uplisting to a higher stock exchange for some time. I am afraid that until it happens, Cellceutix will not get the coverage or the investors' interest it deserves. However, the current situation presents a truly unique opportunity for those who can take the risk associated with early biotech stocks. The PolyMedix acquisition made Cellceutix far less risky than it used to be. I estimate that the current market cap of Cellceutix should be somewhere between $500 mil and $1 bil., possibly even higher with a confirmed partnership that will help move Brilacidin to the market faster.
If Brilacidin moves to the clinic, it will mean a significant stream of revenue for Cellceutix in a relatively near future. This will also take the financial pressure from Cellceutix for the cancer/psoriasis drug development. With current prices, Cellceutix is a significantly undervalued company, which moved swiftly from a Phase I company into a successful Phase II clinical trial company and it should be valued as such.
This article is not meant as a recommendation; only to inspire thought and discussion. You should do your own research and consult with professionals before investing in stocks. Biotech stocks are associated with high risk including a total loss of the principal.
Disclosure: I am long CTIX, EPZM, GERN. 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.