With Cyclacel, The Waiting Is The Hardest Part

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Cyclacel shares have weakened as investors have avoided riskier biotechs, and perhaps due to some worries about potential competitive drugs sponsored by larger companies in pharma/biotech.

A decision to launch a Phase IIb study in r-MDS was contrary to expectations of a pivotal study, but this more conservative move may be the right one.

Even at a lower estimated fair value of $5, Cyclacel appears to incorporate very low expectations for clinical trial success.

This has been a tough year to hold riskier biotechs, and Cyclacel (NASDAQ:CYCC) has been no exception as the shares have fallen by about a third since my last write-up on the company and more than 20% year-to-date. Some investors were definitely angered by the company's decision to launch another Phase II study in MDS instead of the expected pivotal Phase III study, but the shares were weak before that announcement. More likely, Cyclacel has found itself caught up in a "risk-off" move out of biotech and perhaps an increasing obsession with all things immuno-oncology.

Some readers will scoff at what I'm about to say, but I've always pursued Cyclacel from the value/expectation angle. I'm not all that positive on the company's odds of success (not many sub-$100 million market cap biotechs with Phase III oncology drugs see success), but the implied odds of success are indeed quite low and there are data to suggest that lead drug sapacitabine just may show a sufficient survival benefit in elderly AML and MDS patients to merit approval and use. Truing up my fair value estimate pushes my target down to $5 (from $6.50), but that still leaves considerable upside if the company's late-stage trials go well.

A Phase IIb Study In MDS Seems Smart … If Unpopular

Fellow SA author Scrying Biotech has been a more frequent writer on Cyclacel than I, and I believe he is an owner of the shares as well. To say that he was cheesed off about the company's decision to pursue an additional Phase II (a Phase IIb study, to be precise) in relapsing MDS instead of the expected Phase III study may be an understatement.

I'm less bearish on this development. I understand the perspective of some shareholders that they were led to expect a Phase III trial announcement and that the presentation at ASCO was mishandled. To that I would say that this is Rombotis (Cyclacel CEO Spiro Rombotis) being Rombotis - he does things his way and that way is not always what I (or others) believe to be the most shareholder-friendly way.

Turning to the real facts of the matter, the company has chosen to conduct a Phase IIb study of sapacitabine in elderly patients with relapsing MDS. This study will enroll 250 patients who are at least 60 years old and have intermediate-2 or high-risk MDS and have failed at least one prior course of a hypomethylating agent.

The twist is that Cyclacel will be alternating sapacitabine with low-dose chemo (cytarabine) and using low-dose cytarabine as the control. There is not much data supporting low-dose cytarabine as a second-line therapy (and so little historical control info), and frankly not all that much data supporting low-dose cytarabine in MDS overall. As a reminder, though, there really is no established standard of therapy in relapsed/refractory MDS and establishing more data on low-dose cytarabine as an alternative may help guide a future approval decision (it helps to have something to compare sapacitabine to in terms of efficacy).

On one hand, I would normally want to applaud Cyclacel for taking a more conservative approach to MDS and an approach that will give the FDA more data to evaluate if/when it is submitted for approval. Oftentimes small-cap biotechs will just push on into Phase III development at the merest hint of efficacy (often on the basis of post hoc sub-group analysis). On the other hand, the lack of data on low-dose cytarabine introduces a lot of unknowns into the picture. Net-net, I don't think this is a bad move (even if it does consume cash at a cash-constrained biotech) - if the company's SEAMLESS study generates strong data and this Phase IIb is strongly positive, there is a chance (and I want to emphasize chance) that Cyclacel could file for r-MDS without running a pivotal registration study.

Is Competition A Threat?

As has been the case with Clovis Oncology (NASDAQ:CLVS) and Seattle Genetics (NASDAQ:SGEN), I wonder if investor concerns over potentially intensifying competition are impacting the shares of Cyclacel.

Immuno-oncology is the new fair-haired child in the oncology biotech world, with blockbuster expectations already attached to compounds under development at Bristol-Myers (NYSE:BMY), Merck (NYSE:MRK), AstraZeneca (NYSE:AZN). While there hasn't been much announced yet directly relating to AML/MDS, there is the partnership between Bristol-Myers and Innate Pharma (OTCPK:IPHYF) for lirilumab, an anti-KIR MAb that is in a fully-enrolled Phase II trial in AML. That's the only anti-KIR compound I'm aware of at present, but history suggests that it is pretty safe to assume that other companies will figure out how to develop similar antibodies if lirilumab generates strong data.

There may also be threats outside of immunotherapy. Celgene (NASDAQ:CELG) has licensed AG-120 and AG-221 from Agios Pharmaceuticals (NASDAQ:AGIO). These drugs target cancer metabolism (isocitrate dehydrogenase (IDH1 and IDH2) mutations) and could prove effective as a means to effectively "starve" cancer cells.

Maybe these are future blockbusters is AML/MDS, but it will be a while before we know. Neither are focused on the specific market that Cyclacel is targeting (elderly patients) and I wouldn't expect Celgene or Bristol-Myers to focus on that patient segment early on. Of course there would be risks from off-label usage, but Cyclacel is further along in development and I wouldn't avoid the shares just on that basis.

Re-estimating The Valuation

Between the passage of time and subsequent equity offerings, I have had to recalculate my fair value estimates. I continue to value sapacitabine's opportunity in elderly AML on the basis of 50% market share and just 17.5% odds of approval (about half the normal odds of success for a Phase III oncology program). With the new sharecount, the value of this indication falls to under $4/share ($3.90 to be precise). In the case of the r-MDS indication, I've changed some of my market size/market share assumptions (more favorable to the company), but I maintain a very low assumed probability of success (just 10%). I now estimate $1.15/share in value for this indication - admittedly that is a big jump from my prior estimate of $0.85, but just a $1M change to risk-adjusted revenue adds around $0.10/share in value.

The Bottom Line
All told, then, I believe Cyclacel should trade closer to $5/share today. The company should have enough cash to get itself through the SEAMLESS study (enrollment should finish around year-end with data in the second half of 2015). There is huge valuation upside if the SEAMLESS study de-risks sapacitabine (a 50% chance of approval would take the value to over $11 just for the AML indication), but of course there are also significant risks to consider - not that many biotechs with Phase III due in 12-18 months trade below $100M in market cap. Perhaps Cyclacel will be the exception; certainly the market is voting "no" and that may be an opportunity for shareholders who believe the market is wrong and have the patience to see this one through to the release of data from the SEAMLESS trial.

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