CTIC: A Biotech Nerdo-oh
09/17/2004 12:00 am EST
What are nerd-ohs? "No research, development-only companies," explains Mike Murphy. "This is a relatively old business practice that is once again grabbing investors attention." Here, he looks at a fascinating—albeit speculative—biotech NRDO, focused on cancer.
"About a third of the biotech companies to go public since October 2003 have been NRDOs. Instead of going through the whole risky process of discovering molecules for a new drug to target, they simply buy compounds that are already in development—usually ones that have proven some basic safety and efficacy in humans but are available from cash-strapped biotechs or big pharma companies looking for bigger fish to fry. NRDOs typically acquire clinical-stage products and take on the responsibility of subsequent development and regulatory filings. Thus, they face some early-stage developmental risk, but far less than they would if they had to build out a basic drug discovery infrastructure. Our latest recommendation is one such company, trading at a tasty valuation to boot.
"Cell Therapeutics (CTIC NASDAQ) fits nicely into the current zeitgeist of companies that use in-licensing as a way to shortcut the path to product revenues. Despite being valued like an early-stage research company, CTIC actually has one approved product and another potential blockbuster that could be launched next year. The approved product is Trisenox, an arsenic compound used to treat blood cancers. Launched late in 2000, it has proven highly effective in treating acute promyelocytic leukemias (APL) as well as multiple myeloma. While not a huge product, it should bring in about $25 million this year and has substantial growth potential—not to mention patent protection through 2018.
"The real excitement at CTIC, however, is Xyotax, for non-small-cell lung cancer (NSCLC) and ovarian cancer. Xyotax is a special formulation of the widely used cancer drug Taxol, but it’s designed to be safer, easier to administer, and is more effective than its traditional counterpart. Since the taxanes (the chemical class that includes Taxol) represent a $2.4 billion market, a safer and better alternative could mean huge profits. Like Trisenox, Xyotax is an acquired compound—CTIC got it in 1998 from the M.D. Anderson Cancer Center in Houston. Conventional Taxol requires surgical placement of a large catheter and must be infused over three hours or so. Xyotax is a tremendous improvement. It is watersoluble and can be administered as a simple ten-minute infusion. Xyotax is currently in a series of three Phase III trials—all directed at NSCLC—and each can form the basis of a separate submission for FDA approval. A fourth Phase III trial, this time as an ovarian cancer treatment, will begin this fall. Given that Xyotax has FDA Fast Track designation, Xyotax could be on the market in the second half of 2005.
"The company’s $301 million market cap is a bargain price. The firm’s $89.4 million in cash and short-term investments at the end of the second quarter is not a huge war chest, but it is enough to get them through approval. The real risk here is if Xyotax underperforms Taxol or cannot get approval for some other reason. Since CTIC is not well funded, this would put them in a tough position. I think it’s likely Xyotax will be approved. This is a company that has reduced its development risk by licensing compounds at attractive prices, focused on drugs with proven efficacy, and kept the upside almost entirely to themselves. The stock may not really get moving until the most advanced trial of Xyotax data is released, but we want to get in now at this bargain price for a company that has several chances to win—multiple pivotal trials and a good shot at approval. This is a case where the upside potential clearly outweighs the downside risk."
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