Tokai Pharmaceuticals (TKAI) premiered on the NASDAQ exchange on September 17th at $15 per share and surged as much as 50% to end the closing day at $23.76 per share. The stock had already generated a huge interest as it traded around 10.75 million shares during the first trading session.
A lot of new stocks that come to market tend to trade higher often on the first day as many expect a huge pop or what wall street calls "Momo" stocks. "Momo" stocks are certain stocks that trade high based off investor sentiment but throw other metrics like valuations right out the window. To determine whether investors should consider buying shares of Tokai Pharmaceuticals we are going to take a look at the most advanced drug candidate. This look into the most advanced drug compound for the company will allow us to determine if it is worth to buy shares of Tokai.
Tokai's most advanced clinical compound is known as Galeterone which is being studied in patients with castration resistant prostate cancer -- CRPC. There are about 233,000 new cases of prostate cancer each year. Of those 233,000 cases, about 29,480 die from the cancer itself. CRPC stems from the fact that men treated with androgen deprivation therapy are resistant to that type of treatment. Instead of androgen deprivation working against the cancer, it allows the tumor to spread to other parts of the body.
The company ran a phase 2 trial known as the ARMOR 2 trial in patients with CRPC. In the phase 2 trial, patients responded well to an antigen known as the PSA antigen. PSA stands for prostate specific antigen and is used to measure whether or not the patients are responding to the treatment being given. Seven patients were measured as having significant altered androgen receptors, and of those seven patients six of them had significant PSA antigen reductions of 50% or greater. Not only is the Galeterone drug compound shown to be efficacious but it is a safe form of treatment as well. For instance, 94% of the reported adverse events were grade 2 or below. This falls in line with mild side effects that occur where intervention is not needed to treat these additional symptoms. These altered androgen receptors are important in preventing tumor growth in the prostate and other parts of the body. This is because prostate cancer's growth is dependent on the binding of androgens and DHT to a ligand binding domain.
Tokai is impressive with its Galeterone drug because it doesn't only perform one function to stop the growth of these prostate cancers but it does three specific functions:
- It blocks the forming of Testosterone by inhibiting an enzyme known as CY17 -- this is important because prostate cancer cells feed on testosterone to spread
- Androgen receptor antagonism -- this blocks testosterone or DHT from binding with a free flowing androgen receptor. This blocking also stops the growth of cancerous prostate cells
- Androgen receptor degradation -- this mechanism of action by Galeterone reduces the amount of androgen receptor proteins. This halt of androgen receptor proteins stops the production of cancerous cells from being created
Tokai seems to be doing well in its phase 2 clinical trial in treating these patients with CRPC. Other current treatments go about it the wrong way because they actually remove amino acids known as C-terminus.
As you can see above, a lot of current therapies believe that by removing the C-terminus they are able to stop the androgen receptor from ever binding thus stopping the CRPC in its tracks. The problem with that though is that even having an androgen receptor with a c-terminus removed -- also known as C-terminal loss -- allows the androgen receptor to continue to signal its pathway indefinitely. This means that the androgen receptor is still able to produce continuous tumor cell growth by still completing its androgen binding cycle. This binding still occurs with a mechanism of action known as AR-V7 -- Androgen receptor splice variant. On the other hand Tokai's drug Galeterone reduces the formation of the AR-V7 by degrading an androgen receptor. Tokai believes that by eliminating the androgen receptor completely it provides for a better clinical outcome for the patient as opposed to other standard of care therapies only removing one portion of the androgen receptor known as the C-terminal loss.
Shares of Tokai have fallen from its $30 per share high and currently trade at $15.79 per share. There are still risks associated with this company as with all other biotechnology companies. For instance, Tokai's share price will fluctuate up and down until further results are released from the ARMOR-2 clinical trial with Galeterone. This biotech also thus far is only a one drug company so investors may risk losing their entire investment if Galeterone doesn't pan out in later stage trials. With no other drug compounds in the pipeline this would pretty much be a total loss so investors should invest according to what they are willing to lose. Phase 2 results thus far have been remarkable but that doesn't guarantee that the phase 3 results will come out just as good. Clinical trials are adjusted all the time and the FDA may require a higher clinical endpoint needed in phase 3 to consider Galeterone a successful drug.
Financially Tokai is doing pretty well especially since it had just generated a lot of cash on the closing of its initial public offering. Tokai sold 6.4 million shares of its common stock in the open market at $15 per share generating $97.2 million. This means the company should have enough cash to run its clinical trials for at least two years but it will eventually need to raise additional cash. The only way to avoid raising further cash is if Tokai establishes a partner to help burden the costs of running the phase 3 clinical trial. Tokai expects a phase 3 clinical trial for Galeterone testing CRPC patients to be initiated by the beginning of 2015.
We believe that Tokai Pharmaceuticals holds a tremendous opportunity for investors especially since it is trading back in the $15 per share range which is its IPO price. This is a very risky investment as the company is banking on Galeterone to be successful in treating patients with CRPC. If the company fails to impress, then it will leave many investors holding the bag as the company has no other clinical trial in progress. Investors should familiarize themselves with the science and then decide whether they are willing to buy some shares of the company. The fact that Tokai has decided to degrade the androgen receptor completely eliminating it in the tumor using its Galeterone compound is what sets this company apart from all other biotechnology companies performing CRPC trials. We think that Tokai may be on to something special with their Galeterone compound.
Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.