Kadmon Holdings, Initiating Coverage With Buy Rating And First Price Target Of $16

| About: Kadmon Holdings (KDMN)

Summary

Kadmon Holdings is a New York-based emerging biotechnology company that is developing novel small molecule product candidates in autoimmune, fibrotic and genetic diseases, and oncology.

We are initiating coverage on Kadmon Holdings' common stock with Buy rating and a first price target of $16.

The company has several upcoming catalysts in 2017.

Kadmon Holdings (NYSE: KDMN) is a New York-based emerging biotechnology company that is developing novel small molecule product candidates in autoimmune, fibrotic and genetic diseases, and oncology. The company launched it IPO at $12/share in 2016 and the share price is now trading significantly below the IPO price. The company has several upcoming catalysts in 2017. The stock price seems to have bottomed at $3.25 on 3/10/17 and is up-trending. Several noted sell-side analysts have also published bullish ratings on the company recently and several prominent institutional investors own the stock as of 12/2016. We decided to take a look at this company.

(Kadmon Holdings, common stock price chart, from Bloomberg)

Product Pipeline:

(Kadmon Holdings, R&D pipeline)

KD025:

It is an oral, inhibitor of Rho-associated protein kinase-2 (ROCK2) which plays an important role in inflammation and fibrosis.

KD025 in moderate to severe psoriasis:

Psoriasis affects about 7.5 million Americans. About 20% patient have moderate to severe disease that requires therapy with systemic agents like methotrexate, TNF-alpha inhibitors, etc. ROCK2 inhibitors are beneficial in psoriasis by reducing Th17 activity (that reduces inflammation), and increased number and function of Tregs (which helps in resolution). KD-25 inhibited Th17 cytokine secretion in healthy human cells in an in-vitro study.

KD025 has completed a first phase 2 open-label study. In this study, 85% patients with moderate to severe psoriasis achieved Psoriasis Area and Severity Index (PASI) score improvement. This score measures the percentage of the body skin affected by psoriasis and the severity of skin lesions. At least 50% improvement in PASI score (PASI-50) was seen in 71% patients in 200 mg BID dose and 42% patients in 400 mg daily dose (after 12 weeks of treatment). No drug related serious adverse events or clinically relevant adverse events were seen. Grade 2-3 elevation in serum transaminases was seen in 7 out of 38 patients. Most systemic psoriasis drugs have side effects, for example, methotrexate causes liver toxicity and TNF-alpha inhibitors cause increased risk of infections including tuberculosis. In view of complications of untreated psoriasis like psoriatic arthritis, eye disorders like uveitis, cardiovascular disease, etc., these side effects are considered acceptable.

KD025 is being tested in a second randomized, double-blind, placebo-controlled trial in 150 patients with moderate to severe psoriasis. The study has 5 treatment arms- KD025 200 mg daily, 200 mg BID, 400 mg once daily, 600 mg once daily and placebo for 16 weeks. The study primary end-point is PASI-75 (at least 75% improvement in PASI score) which has been the standard in pivotal psoriasis trials. Results of the trial are expected in Q4, 2017.

In comparison, PASI-75 for existing systemic psoriasis therapies is: methotrexate (36-41%), adalimumab (66%), etanercept (38-52%), infliximab (80%), ustekinumab (anti-IL-12/23 antibody= 66 to 76%), secukinumab (anti-IL-17 antibody= 72-82%), ixekizumab (IL-17A antibody=87-90%), brodalumab (anti-IL17A= 86%), guselkumab (IL-23 antibody=100%), tofacitinib (JAK inhibitor=68%), ponesimod (S1P1 modulator=77%), baricitinib (JAK 1/ tyrosine kinase inhibitor=54%). Kadmon is testing higher dose of KD025 for longer duration in the second phase 2 trial, so we expect even better results than the first phase 2 trial.

KD025 in idiopathic pulmonary fibrosis, IPF:

IPF affects 128,000 patients in the US and 48K new cases are diagnosed every year. ROCK inhibitors reduce collagen deposition and stellate cell formation and attentuated lung fibrosis in a bleomycin mouse model. KD025 is being tested in an ongoing open-label, randomized, phase 2 clinical trial in 36 IPF patients already treated with pirfenidone and/or nintedanib. 400 mg daily dose will be tested for 24 weeks. The primary end-point of the trial is safety and tolerability, and % change in FVC from the baseline after 24 weeks of treatment. The study data is expected in Q4, 2017.

KD025 in chronic graft versus host disease, cGVHD:

cGVHD is a common and often fatal complication after allogenic stem cell transplantation. ROCK inhibition downregulates proinflammatory cytokines IL-17 and 1L-21 that play a key role in cGVHD pathogenesis. An ongoing dose-finding, open-label phase 2 study is testing various doses of KD025 in cGVHD (results expected in Q4, 2017).

Tesevatinib:

It is an oral, reversible, EGFR inhibitor that is being tested in EFGR+ non small cell lung cancer (NSCLC) with brain/leptomeningeal metastases due to its high blood-brain barrier penetration. It showed 57% ORR and median OS=22 months in a phase 2 study in treatment-naive EGFR+ NSCLC. It is being tested in a phase 2 study as first line therapy in treatment naive EGFR+ NSCLC with brain metastases, and as third line treatment in EGFR+ NSCLC with brain/leptomeningeal metastases. There is no approved systemic therapy in this clinical indication. Results of the trial are expected in Q4, 2018.

More than 25% glioblastomas (a potentially fatal brain tumor) have EFGR mutation. A phase 2 study of Tesevatinib in this indication is ongoing.

Tesevatinib is also being tested in autosomal dominant (AD) polycystic kidney disease (NYSE:PKD) and autosomal recessive (NYSE:AR) PKD. PKD is the most common monogenic disease that affects about 600K patients in the US. EGFR and Src promote PKD progression and by downregulating their activity, Tesevatinib has the potential to be beneficial in treatment of PKD. Data from an ongoing phase 2a study in ADPKD is expected in Q4, 2018. Data from an ongoing phase 1 study in ARPKD is expected in Q4, 2017.

Leadership:

CEO and President, Harlan Waksal, MD: He was the co-founder and CEO of Imclone (acquired by Eli Lilly).

Chief Medical Officer, John Ryan, PhD, MD: He served as the Chief Medical Officer at Cerulean Pharma and Aveo Pharma. He also served as the Senior VP of Translational Research at Wyeth and Executive Director of Clinical Research at Merck.

The Board of Directors includes a co-founder and former CMO at Dermira (NASDAQ: DERM), current CEO at MeiraGTx, a former Group VP at Schering Plough, and the current Chairman of Board at MeiraGTx.

Financials and valuation:

The company is expected to have $80 million in cash reserves after the recent $23 million private placement this month. At current cash burn of about $50 million per year, we don't expect need for additional immediate funding.

We expect KD025 to be priced at an average wholesale price, AWP of about $65K/year in the US in treatment of moderate to severe psoriasis (which is in line with AWP for ustekinumab, adalimumab and secukinumab). Using inputs of ASP=$48K/year (at 74% of AWP, average for US as per Pharmagellan guide), cumulative probability=23% (using probability of success for phase 2 and 3 trials and regulatory stage success for autoimmune disorder drugs, from Pharmagellan guide), drug launch in the US in 2020 and peak 5% market share 6 years after launch, and target US market=1.5 million patients, we modeled peak risk-adjusted revenue =$830 million in treatment of moderate to severe psoriasis in the US. In comparison, peak global sales estimates are: ustekinumab=$1.2 billion, ixekizumab=$1 billion and guselkumab=$1 billion.

We expect KD025 to be priced at higher about $94K/year AWP in the US (due to orphan indication in IPF), which is line with AWP for existing IPF treatments like pirfenidone and nintedanib. Other potential competing therapies are in development, including Galapagos' GLPG1690, Lebrikizumab (Genentech), Eotaxin-2 targeted mAB and chemokine receptor-4 targeted mAB. Using inputs of ASP=$69.5K/year (at 74% of AWP, average for US as per Pharmagellan guide), cumulative probability=20% (using probability of success for phase 2 and 3 trials and regulatory stage success for respiratory disorder drugs, from Pharmagellan guide), drug launch in the US in 2020 and peak 20% market share 6 years after launch, and target US market=128,000 million patients, we modeled peak risk-adjusted revenue =$356 million in treatment of IPF in the US.

After adjusting for non-operating assets, net operating loss carryovers and debt, we calculated fair value of equity= $949 million, or $15.92 per share (using diluted share count).

We are initiating coverage on Kadmon Holdings' common stock with Buy rating and first price target=$16. Future revenue from other indications like Tesevatinib may add further upside. Piper Jeffrey issued Buy rating on 3/14/17 with price target=$7. HC Wainwright issued Buy rating on 2/1/17 with price target=$25.

Several notable institutional investors held the stock as of 12/31/2016. Third Point, LLC (Daniel Loeb) owned $26.3 million of stock (17% of outstanding shares), Perceptive Advisors (Edelman) owned $7.3 million of stock (4.9 % of outstanding shares), while Point 72 (Steve Cohen) owned $3.5 million of stock (2.3% of outstanding shares).

The CEO bought $26K worth of stock while the CFO bought about $24K worth of stock in November 2016 (at $5.43 to $5.96/share). Third Point bought the stock at $7.79 to $10 in Aug-Sept 2016 and bought $5 million more of common stock on 3/15/2017.

Near-term catalysts:

- Phase 2 results of KD025 in moderate to severe psoriasis are expected in Q4, 2017.

- Phase 2 results of KD025 in IPF are expected in Q4, 2017.

- Phase 2 results of KD025 in cGVHD are expected in Q4, 2017.

We expect the stock price to have a run-up into Q4, 2017 due to these catalysts.

Risks in the investment:

It is possible that the ongoing clinical trials may fail, regulatory agencies might not approve the products, unexpected side effects might be seen in the future, clinicians might not widely prescribe the products or insurers might not reimburse them. Competing products from other companies might gain significant market share in the planned clinical indications. The company may also need to raise additional capital in future.

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Disclosure:

This article represents my own opinion and is not a substitute for professional investment advice. It does not represent solicitation to buy or sell any security. Investors should do their own research and consult their financial adviser before making any investment.

Disclosure: I am/we are long KDMN.

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.

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