Context Therapeutics: A New Biotech Issue With A Low Valuation And Significant Potential

Summary

• Context Therapeutics is developing a potentially best-in-class Progesterone Receptor Antagonist that has already been validated in several female cancer indications.
• Biotech IPOs have accelerated throughout the pandemic with 76 companies raising in 2020 and 81 IPOs through the end of September of 2021.
• Context Therapeutics debuted last week at a far lower price than originally contemplated, while the sector (XBI) was almost 40% down from its February high.
• In my opinion, this company is undervalued and an opportunity exists to take a position before the larger market realizes the potential within Context's pipeline.

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What a year it has been for biotech investors

The world has profoundly changed since COVID-19 arrived. Loved ones departed too early. Economies and supply chains wrecked. Early cancer diagnoses missed because of lack of access to care. I'm sure as time elapses and we're able to zoom out from this "experience" there will be many books written about the various consequences (health and otherwise) of what we've been all going through together since early 2020.

One fact that emerged early in the pandemic was the central role that the Biotechnology sector would play in bringing new technologies into practical use, in particular, mRNA vaccines. The pandemic also fueled a great deal of new research into antiviral strategies, but also in improving our understanding of how our own immune systems can harm innocent tissue when presented with Covid. Nearly every immunology text book needs rewritten in the context of what has been learned throughout our experience with Covid.

Not surprisingly, the stock market recognized the opportunity that Covid presented to the biotechnology sector, and the sector outperformed in 2020. Our fund never invested in any companies engaged directly in the war on Covid, but the associative effect on the entire sector delivered for us a record 170% return. A great year by any measure. 2021 began with a continuation of the momentum in XBI, but then in February everything began to reverse.

Another feature of the biotech boom of 2020 was a record number of new Biotechnology IPOs. 76 companies, in total, debuted in 2020. 2021 actually broke that record, with 81 companies IPO'ing through the end of September. In my opinion, this was not helpful for individual valuations because in effect what we saw were outflows of capital from the sector while the sector was expanding.

As mentioned above, in mid-February of 2021, the sector began a downtrend that has yet to be firmly broken. I believe the downtrend was the product of the following four factors:

1. With mass vaccinations underway in the US, it made sense that the Covid trade would unwind and just like it took the sector up in 2020, it took the sector down in 2021.
2. The new administration pledged drug pricing reform and reform on corporate taxation that could impact the entire sector.
3. Meanwhile, our dysfunctional congress has kept clarity on Biden's plan in limbo (and still is except drug pricing is off the table for now). Lack of clarity on capital gains has limited M&A activity in biotech, a primary driver of sector valuations.
4. Lastly, regulatory uncertainty at FDA since the Aduhelm approval has introduced an element of unpredictability at FDA regarding new drug approvals. Aduhelm was approved under the accelerated approval pathway, which generated significant criticism of it. Since then FDA appears to be operating as if the program no longer exists.

On February 10, XBI peaked at around $175 and it fell to nearly $118 before finding its footing. Now with drug pricing reform off the table, and legislation finally coming together on the Build Back Better plan, it appears that the Biotech may resurrect itself. On the M&A front, I expect deal flow to pick up significantly once the ink dries on a final bill. So from a cyclical perspective, I think we could enter an uptrend for biotech stocks. I don't know if it's a bet the farm moment on the sector, however, because the larger market is at a cyclical high and any correction in Nasdaq or the S&P could temper a move upward.

Instead of investing in the sector, I really think this is a good time to pick up specific smaller names of companies that have solid pipelines but depressed valuations. The last quarter of the year also has a number of conferences where biotech companies generally publish interim data in new drug development. Three smaller companies that I really like in the sector for a 4th quarter rise are Checkpoint Therapeutics (CKPT) which will read out with data on Cosibelimab probably in December, and Oncternal Therapeutics (ONCT) for their unpartnered ROR1 antibody, and Mereo BioPharma Group (MREO) for their unpartnered anti-TIGIT antibody. We're long on all three of these names, FYI.

Context Therapeutics is a recent biotechnology IPO

Today's article is on a brand new issue named Context Therapeutics (NASDAQ:CNTX) which held its IPO on October 20. According to Context's Free Writing Prospectus filed with SEC on Sept 29, they had originally planned on IPO'ing in a range of $12-14 per share. However, when the final version was filed on October 18, immediately prior to the IPO, they had lowered the offering price to $5 per share.

Context sold 5,000,000 shares into the offering using ThinkEquity as the sole book-runner. ThinkEquity is a capable, but smaller investment banking firm. Immediately prior to the offering, there were 5,209,792 shares outstanding meaning post-IPO there are a little over 10 million shares currently outstanding (see other recent SEC filings to understand the full cap table including employee option programs, but I think it's fair to estimate the full share count at under 11 million shares fully issued and diluted). Gross proceeds from the offering were approximately $21M.

My take on the IPO is that while the fundamentals of the company drove the initial valuation at $12-14, the reality of the capital situation for the sector demanded more attractive pricing. The weakness in the sector and the record number of IPOs for the year within this weak sector forced a discounted offering.

The FURUs pick a "good one"

My last Seeking Alpha article outlined the bear case for Onconova (ONTX) which had a Phase 3 trial nearly completed for Rigosertib. Our fund had been invested in the company, and noticed that several vocal influencers on Twitter were apparently also invested in the company. In my iterative research on that company, I eventually uncovered a scientific controversy around the mechanism of action of its primary drug candidate. Based on this, we sold (and did not go short) and I published an article about the company in which my sincere interest was to warn retail investors about this data, and its likely outcome. As I predicted, the trial failed. Before the read-out, I was subject to a lot of criticism for putting out the article, the usual stuff, that we were short, etc. But when the trial failed, many were sorry they did not heed my warnings. We are long only, and that was an ethical commitment that we made when we put our fund together because we want to align ourselves with promising therapies, not bet against them and potentially hurt their capital availability from the markets.

The investment community on Twitter provides a big source of information on the sector to retail investors, but also folks like me. I've found it's wise to keep an eye on what's trending with the influencers to help predict movements in individual companies. I am, by practice, an investor in fundamentals. I often see value when others don't necessarily see it just because my approach is different. Since what I see in fundamental value is obviously different than market value, if I see a name that I like getting a lot of attention in social media, I pay much more attention. Many times, these influencers focus on lower float companies. When you have both good fundamentals and a low float, these tend to present unique opportunities.

One recent company "pumped" by a number of prominent "FURU's" is Context Therapeutics. IF I look at a company that is the subject of a recent social media frenzy, my approach to these companies is always pessimistic. I look for the problems, I look for the holes, but in the case of this particular company I really liked what I saw in the science underlying the company's strategy. As Zack Morris said recently, "Holes will be filled", and I'm sure when he said this he was referring to holes in the investment thesis. Right? Right.

Context Therapeutics is Focused on Female Cancers

Context has a pipeline of two drugs in development:

• Onapristone-XR, a full antagonist of the Progesterone Receptor (PR)
• Claudin 6, a bispecific monoclonal antibody targeting CD3 and CLDN6

We will not really discuss Claudin 6 today because that asset was acquired recently and is still pre-clinical (meaning not in any human trials yet). But in a nutshell, the thesis is that by linking T-cells to tumor cells expressing Claudin 6, it will stimulate tumor cell lysis in ovarian and endometrial tumors.

The important candidate in Context's pipeline is Onapristone-XR.

Progesterone is an endogenous steroid (meaning that we make it within our bodies) involved in regulating the female menstrual cycle and pregnancy. It also serves as an important effector of embryogenesis during gestation. Importantly, Progesterone appears to have a role in breast and ovarian cancers where Progesterone and Progesterone agonists can amplify carcinogenesis. Hilton et al, published a great review on this in 2015. Context also points readers to this review for additional general background on Progesterone's role in various cancers.

Many hormones, like insulin, bind a receptor on the external surface a cell and from there, cell signaling mediates impacts to cell operations through what's called signal transduction. However, steroid hormones like progesterone can flow through the cell wall and instead interact with a receptor inside the cell, in this case called the nuclear progesterone receptor (nPR or PR). Progesterone receptor has two isoforms, PRA and PRB where PRB is full length PR while PRA is a shorter version missing the first 164 amino acids. In normal breast tissue, the two isoforms are relatively balanced, but in cancer, PRA becomes more predominant, and in fact high PRA to PRB ratios in tumors predict poor patient outcomes.

Once native progesterone binds either PRA or PRB, the receptor becomes a "dimer" meaning it binds to another PRA or PRB. Dimers of PR can be homodimers (PRA-PRA, PRB-PRB) or heterodimers (PRA-PRB). Once dimerized, PR migrates to the nucleus where it directly regulates the transcription of various genes.

Most people familiar with various breast cancer classifications are familiar with "ER+" cancers, meaning these are cancers that grow in response to estrogen. 80% of breast cancers are ER+. What's less known, however, is that approximately 80% of ER+ cancers are also PR+ and for the last ten years, modulation of the PR signaling pathway has been growing in interest in terms of improving outcomes in breast cancer, but also several other cancers. For example, in later stage prostate cancers (castration-resistant) PR+ signaling is often a factor. In lay terms, when cancer cells become PR+, they are able to turn on more genes that tell the cancer cells to grow and multiply.

The issue with PR-targeting therapies has been the lack of highly specific PR-targeting drugs available to test in the clinic. Onapristone (Ona) antagonizes the progesterone receptor and prevents it from becoming a dimer. Ona also does not allow PR to bind DNA so the genes that are normally turned on by PR are not. Onapristone was first tested in animals and human cell lines. Then after showing potential, it was tested in breast cancer in the 90's by Schering AG, and demonstrated anti-tumor effects in a first line setting.

Previous clinical data generated clearly validates the anti-cancer potential of Onapristone

In this 1995 study published in 1999, 19 patients received 100mg/day Onapristone. 17 of 19 were ER+ and 12 of 18 (one patient dropped out) were confirmed to be PR+. Of these 18 patients, 10 (56%) showed a partial response and 2 (11%) showed stable disease. These data were comparable to tamoxifen (anti-estrogen), but many of the patients developed abnormal liver markers which killed the drug development of Onapristone. Importantly, this study validated the approach to target PR, but it was concluded that new PR antagonists would be needed to proceed further.

Context Therapeutics is testing an extended release formulation of Onapristone, ONA-XR.

From their S-1/A, Context was founded in 2015. They are a Philadelphia-based company and licensed ONA-XR from Arno Therapeutics in 2017. Arno had licensed Onapristone from Invivis (who licensed it from Schering AG) and developed the Extended Release version of the drug. Arno went under in 2017 after stumbling on the drug's development in late stage prostate cancer. I do not think that Arno failed due to Onapristone not being effective, but rather due to lack of execution by prior management and then simply running out of ways to raise the capital needed to continue to fund development. I'll elaborate more in a bit.

Context possesses a well balanced and diversified management team that have brought a number of drugs from early-stage to market and divestiture. Their IP consists of several patents around ONA-XR and claim patent protection through at least 2034, subject to extension. When I look at the senior executive management team for any biotech, first I want to see people that have cut their teeth while working for different and successful biotech companies. If they're all alums of one company, that makes me more nervous. The CEO, Martin Lehr, is a VC with a deep background in Biotech. While I love speaking with Physician and Scientist founders that take the CEO role (because we speak the same language), my experience is that they make less ideal CEOs whereas CEOs that have an investment banking background know that we've got two goals when we invest in their companies: First, to get new life-saving drugs to market. Second, and not to be forgotten, to create a return for the investment capital brought in to develop these new drugs.

The first and most important step in redeveloping a drug like ONA in an extended release formulation was to run a safety trial to ensure that hepatotoxicity was no longer a factor. In July of 2020, those data were published. 88 patients with PR+ malignancies were treated with ONA-XR. Elevated liver markers were found in 20% of patients with liver mets (cancer had already expanded into the liver) but in patients without liver mets, only 6.3% had elevated liver markers. Additionally, in several of patients that did observe abnormal liver function, several patients were assessed as unrelated to ONA-XR by the safety data review committee.

The theory on why Onapristone-XR does not have impact on the liver is that with the instant release version of the drug, there may have been some off-target binding on hepatic glucocorticoid receptors. The reformulation in the extended release form likely keeps plasma concentration low enough that it can still impact its primary target (PR) while not activating GR's.

Arno had previously completed a dose finding study on ONA-XR

A dose finding study that had been previously completed by Arno looked at a basket study of Onapristone in a variety of PR-expressing cancers. They had their brand new formulation but needed to see how the new formulation performed pharmacokinetically in humans. So they treated at least 6 patients in 5 different dose levels for at least 8 weeks (from 10mg up to 50mg twice a day (BID)). They were able to identify 50mg BID as the recommended phase 2 dose for ONA-ER. This was not designed as an efficacy study, but often the stock market treats every trial as an efficacy trial. I have seen this so many times where the market expects something entirely different than what management intended on small exploratory trials.

Investors in Arno could probably point to this data release as one of the big reasons that Arno went under, yet the aim of the study was simply to begin the process of establishing the clinical development strategy and Phase 2 dosing for future trials. Doing so in a heavily pre-treated population offers hope and potential benefit to patients that have few other treatment options.

Here's a bit of nuance for those who don't live in the world of clinical trial recruitment: These types of trials where you're trying to dial in on the right dose are easier to recruit in end-stage patients, but doing so can be a double-edge sword because in patients with advanced cancer, many times its unrealistic to see significant improvements in patient outcomes (and then the market may decide to punish your stock). The best you'll often get out of a trial like this are indications of response, or maybe molecular data that helps validate that you're hitting the target. Once you have that basic stuff figured out (i.e. dosing/formulation), then it's much easier to recruit a more cogent trial for patients in your targeted area (who are probably weighing other choices for what trial they enter).

Context Therapeutics has put together a well-balanced mid-stage clinical development strategy for ONA-XR.

Context is aiming ONA-XR at several indications. In breast cancer, they are seeking to enhance the efficacy/duration of response in a first line setting where the current standard of care (SoC) is anti estrogen therapy plus a CDK4/6 inhibitor in metastatic cancer. To be clear, a meaningful trial in first line metastatic breast cancer has yet to be done with ONA-XR and the only trial in which ONA-IR (instant release) has been tested had an overall response rate of 55% and an overall clinical benefit rate of 66%. The breast cancer community deserves a well-designed trial with ONA-XR. Pharmacokinetic studies have shown, as has the safety study, that drug concentration is far better regulated in the extended release version.

Context also has a small study in the Adjuvant setting dubbed the "Window of Opportunity" Enrollment has completed on this study and Context has guided that a data presentation will take place in 4Q2021 on this trial. From a scientific perspective, there can be no question that Onapristone has an impact on Progesterone signaling. The question, rather, is whether Onapristone has the ability to measurably change the course of the various indications being sought. When Greenwich LifeSciences (GLSI) published data in the adjuvant setting last year on their GP2 protein fragment of HER2, the share price shot up by around 3000% in a short squeeze that we biotech folks are still reminiscing about. If Context produces similar data in their Adjuvant trial (a setting that has NEVER been tried with either form of Onapristone) it could open a door for an enormous market. From a molecular perspective, this is not a bet that I would want to go short against.

Context is also enrolling patients in the 2nd/3rd line setting in metastatic breast cancer. These are small Phase 2 trials intended to inform the design of a larger study, if successful. Dosing in this trial, called the SMILE study, just began last week and the company issued a PR on this.

Outside breast cancer, there are two other "shots on goal" within the current oncology pipeline. The first is in Recurrent Endometrial cancer in combination with Anastrozole, an aromatase inhibitor. This trial began in January of 2021. But the second indication is where I am probably most interested in Context and Onapristone.

Context Therapeutics currently has the only actively recruiting trial in Granulosa Cell Tumor of the Ovary

Granulosa Cell Tumor (GCT) of Ovary is a rare type of ovarian cancer, accounting for only 2% of all ovarian tumors. Nearly all of these tumors are PR+ and current treatments are very limited in this cancer. GCT is one of the few cancer indications where surgery and PT-based chemo are still standard of care and no approved treatments exist for recurrent GCT. Antiestrogen therapy, incidentally, is often prescribed in GCT, but is not effective.

Context has already completed enrollment in a 14 patient cohort of late stage GCT patients with ONA-XR mono therapy. As of Aug 2, 2021 two patients are still on therapy with stable disease, but overall, Onapristone yielded stable disease in 64% of the patient population (Trial Link).

Another basket of earlier stage patients with GCT is currently being run in combination with anti estrogen therapy in 25 patients.

I like the prospects in GCT for several reasons. First, this indication is an open field with no competition in the market or in development. If you search the indication on Clinicaltrials.gov, you'll see for yourself that Context has the only actively recruiting trial in GCT of Ovary. Because this is such a rare cancer with no effective therapies, they could also apply for FDA's Breakthrough Therapy Designation in this indication and based on the first cohort, they could have a shot. This would expedite the process for Onapristone to get to market much faster than the traditional path as well as give them more direct lines of communication with FDA. So in GCT, I can see a clear path to market so long as they can expand on data that they already have.

Context Therapeutics appears to have a solid risk/reward at its current valuation

Context was able to raise approximately $21M from their IPO. Their 2020 loss from operations was $2.6M and their loss through June 30, 2021 was $5.9M, reflective of increased G&A associated with their IPO prep, but mostly due to the licensing of Claudin 6. I would expect their cash burn to remain low until we hear of some additional validation of their existing programs. But make no mistake, if they're successful, they will either need to partner, raise additional cash, take on debt, or some combo of all three if they're going to get Onapristone to market. In the meantime, you have a company with a validated clinical asset (and one program in the pre-IND phase with Claudin 6).

I stare at biotech valuations all day because I'm much more of a fundamental investor than a chart guy. At a market cap of approximately $60M you arrive at an enterprise value of less than $40M which, to me, appears undervalued for a company running 4 Phase 2 trials with a validated clinical asset. Why? I think the reason for the low valuation can be attributed to a few factors:

1. ONA-XR is a recycled asset from a failed company. While it appears negative on the surface, it actually happens very frequently where clinical assets change hands multiple times before finally reaching market (or not). To me, the development story makes sense, the science makes sense, and the trials that Context put together should answer the question for whether there is a place for Onapristone-XR.
2. This was a very small IPO underwritten by a small Investment Bank plopped into a sea of over 150 fresh IPOs during a pandemic where all we care about is Covid.
3. The IPO was conducted at a cyclical low for the small cap biotech sector

I think that under normal market conditions, they could have easily IPO'd within their original contemplated range of $12-14. When I try to eyeball valuations for very early stage companies I do not consider discounted cash flow models, rather I do peer analysis handicapped on my own view of the underlying science. When I contemplate their programs, but especially the opportunity for a white space indication in Granulosa Cell Tumor of the Ovary where the science on a molecular level looks so well-matched for this indication, I would have estimated a valuation of the IPO in the range of $150-200M. But since cash is low relative to what will be needed to move the ball into the red zone, I'd stay on the lower end of this at $150M. If I work this back into the fully diluted shares outstanding, I get almost exactly $14 per share. It looks right, smells right, and is 100% in line with what they had contemplated prior so that is my price target at this point in time for Context.

In their Free Writing Prospectus, they outline the use of proceeds as $9.5M to clinical development, $5.5M to the Claudin 6 bispecific work that might get them to the clinic, and $6M for general corporate use. In terms of upcoming milestones, they've guided a presentation on the Window of Opportunity in Q4 of 2021. Then in 1H2022 they have guided for a trial update on the Phase 2 first line

This is a rare situation for me because I believe I am the first to independently do a public presentation of the fundamentals of Context Therapeutics, no analysts currently cover the company and there are no price targets. But as the company makes progress towards its goals, these will come and so I think this is probably a ground level opportunity to speculate, at a very reasonable valuation, on what happens next for this molecule and this company. As with anything in Biotech, it is wise to treat an investment of Context as speculative with a significant risk component if they are to fail on one or more of their goals.

Having presented themselves as a company focused exclusively on female cancers, this could also make it an attractive target for ESG-focused investments. Clinical development has been a "Man's world" for decades. There are plenty of companies focused on female reproductive health, but I'm not aware of any exclusively focused on female oncology. Thanks for reading, and give me a follow on Twitter where I post more frequent (and shorter) thoughts on companies I like.

In summary:

• Context Therapeutics is a speculative recently-IPO'd small cap biotech company focused on the female oncology space
• Their primary asset, Onapristone-XR, has both complementary and unique opportunities spread across four Phase 2 clinical trials
• One of these clinical trials is in a rare cancer for which no effective therapies exist and no approved therapies exist in patients who have progressed on Platinum-based chemo
• I have a current price target of $14 based on their stage of clinical progress, this will increase if they are able to produce promising data in ANY of their trials, although one must remember that there will be additional capital needs in 2022 as various programs read out and new trials are planned.
• As a speculative investment in the biotechnology space, it is always important to limit these types of investments to risk capital only, consult with your financial advisor to vet the appropriateness of an investment for your unique financial situation, and only invest what you can afford to lose.

Analyst’s Disclosure: I/we have a beneficial long position in the shares of CNTX either through stock ownership, options, or other derivatives. 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.