For clinical stage biotechs, valuations can be based on hype, speculation, attention from the press or any similar fortuitous circumstance. The only semi-concrete things to go on for price discovery of these securities sweeping financials aside and speaking in broad strokes, are 1) clinical milestones reached (or in other words, chances of eventual approval), 2) potential market size of the approved drug.
By that logic, it would make sense to say that all other things being equal, two clinical stage biotechs at the same point in the clinical pipeline with similar chances of approval for drugs with similar potential market sizes, should be valued similarly, or at least in the same ball park. While it can be said that there are a myriad of factors that influence the month to month, and even year to year valuations of these companies, market caps will eventually tend toward an equilibrium based on chances of approval and potential market size of the product.
That said, when you spot an odd man out in this space by these metrics, there are profits to be made.
GenSpera (GNSZ) is an odd man out by this consideration, compared to its peers. For those not yet familiar with the company, there are a number of articles on the potential of GenSpera in its relevant market. In short, GenSpera is a clinical stage biotech with a focus on cancer treatment through prodrug delivery.
The company’s lead investigational agent is mipsagargin, and it is this drug that sits at the root of the disparity between company’s current market valuation and that of a number of its peers.
Mipsagargin is a prodrug treatment with a current lead application towards liver cancer. The drug targets an antigen expressed only in the blood vessels of solid cancer tumors. This antigen dissolves a peptide attached to the active drug and releases an active ingredient called 12ADT, resulting in the death of cancer blood vessel cells. Since only cancer blood vessels can activate the drug, it is very finely targeted.
The drug recently completed phase 2 trials, with promising results presented at the ASCOGI symposium last month. The phase 2 results demonstrated a good clinical safety profile, minimal unmanageable side-effects, disease stabilization and clinical activity. The company is nowseeking patients for a larger trial in Asia, and a partner for a phase 3 trial in the US.
The important thing here is the market potential for mipsagargin. Currently, there is only one drug treatment that is FDA approved and has been shown to prolong survival in liver cancer patients –Sorafenib, marketed as Nexavar by Bayer (BAYRY) and Onyx Pharmaceuticals, now Amgen (AMGN). In 2013, Nexavar generated $1.06 billion revenues, as a treatment for both kidney and liver cancer. Breaking these revenues into two to account for the revenue generated from its kidney cancer incidence, it is reasonable to conclude that the market for a liver cancer treatment is somewhere around $500M annually.
In short then, GenSpera’s has currently successfully completed phase 2 for a drug with a potential market of $500M. It is currently valued at $26M. So our task is to find other clinical stage biotechs with little to no revenue that have completed phase 2 for a drug with a potential market of somewhere around $500M. What are they valued at?
Enter NeuroDerm (NDRM). NeuroDerm is also clinical-stage with no significant revenue. It is developing next-generation treatments for central nervous system (CNS) disorders. The company’s lead application is a range of liquid formulation treatments designed to treat Parkinson’s disease across the full scope of severity. The company announced the results of its phase 2 trials in December last year, trials that yielded positive results for both its ND0612H treatment, aimed at severe sufferers, and its ND0612L treatment, a lower dose version aimed at moderate sufferers. In a December 9, 2014 initiation report, analysts suggested that the market potential for both drugs could reach $720 million by 2018.
At current prices, NeuroDerm has a market capitalization nine times that of GenSpera’s. One might expect something a little higher than $26M given the slightly higher market potential with some wiggle room for other miscellaneous differences, but 9x is a humongous difference. Either NeuroDerm is severely overvalued, or GenSpera is severely undervalued. More examples are need to confirm which one it is.
Another example is, Bind Therapeutics (BIND). While Bind has some revenue, it is nowhere near enough to cover its clinical stage losses. This company’s lead drug candidateis called BIND-014 – a novel anti-cancer treatment targeting non-small cell lung cancer. Bind presented positive phase 2 results of its candidate in November last year, announcing that the study met its primary objective of showing antitumor activity as measured by overall response rate and promising antitumor activity and survival in patients with KRAS mutant tumors. A comparable treatment – and in turn, one can be used to estimate the market potential of BIND-014 – is gefitinib, marketed by AstraZeneca and Teva as Iressa. During the second quarter of 2013, Astrazeneca reported $156 million revenues generated by gefitinib. Multiplied across the year, this totals around $600 million annual revenues – very similar to the projected market potential for Mipsagargin. Bind’s market capitalization exceeds that of GenSpera by more than five times. Again, there are of course other differences that could allow for a variation of a 100% or maybe even 200% difference, but 5x is extreme.
Finally, CytRx (CYTR). This company’s lead candidate is an anthracycline, or a type of antibiotic used as a chemotherapy agent, called Aldoxorubicin. The treatment is a potential replacement treatment for Doxorubicin, the first anthracycline to gain FDA approval. Doxorubicin, however, is associated with a number of mild to severe side-effects, and Aldoxorubicin is believed to reduce adverse events, improve efficacy of the treatment and reach the target site more quickly. During 2013, Doxorubicin had global sales of just short of US$210 million. This puts the market potential at less than half of that of GenSpera’s mipsagargin, yet the market currently values CytRx at more than nine times GenSpera.
These are just three examples of a wider pool of development stage biotech companies that have recently reported positive phase 2 results and that – while among GenSpera’s peers in this regard – are valued at many multiples of the company. When considered against both the market potential for its lead candidate and the disparity between its valuation from a range of its peers, GenSpera looks dramatically undervalued.
Obviously, it goes without saying that investment in a development stage biotech based on positive results of any phase of trials is risky. Only a small number of trialed treatments achieve FDA approval, and even upon this achievement, a smaller number are actually commercial successful and reach their full market potential. However, for those looking to take a position in a speculative biotech stock, the potential reward in a GenSpera allocation looks to be much larger than that associated with a number of the other options in the space, given its apparent undervaluation.
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