Celator Pharmaceuticals (CPXX) is a compelling investment as an undervalued biotechnology company with a wholly-owned, clinically de-risked asset offering 50-100% upside. With a positive Phase III study showing overall survival benefit in AML (a drug development wasteland), we believe CPXX is a likely takeout candidate and management compensation was recently reflected to ensure that they are open to such an outcome.
Phase 3 Results
CPXX's lead asset, Vyxeos, is a non-scale liposomal formulation of cytarabine and daunorubicin. Cytarabine and daunorubicin are chemotherapy agents, and Vyxeos is effectively a fixed dose combination of the two agents that allows for a better therapeutic window.
CPXX recently announced positive results from their Phase 3 study of Vyxeos in patients with high-risk (secondary) acute myeloid leukemia (AML) which compared Vyxeos with the standard of care regimen of cytarabine and daunorubicin known as 7+3. The results were high statistically significant with median overall survival (OS) of 9.56 months compared with 5.95 months for patients receiving 7+3. The OS hazard ratio (HR) was 0.69 (p=0.005) which represents a 31% reduction in the risk of death compared with 7+3. Lower is better for HR and typically you want at least a HR of 0.80, thus the HR here is very impressive.
Landmark OS analysis (which looks at the percentage of patients alive at a given point following randomization into the trial) showed that at 12 months 41.5% of the patients on VYXEOS were alive compared with 27.6% for the 7+3 arm. At 24 months after randomization it was 31.1% for VYXEOS compared with 12.3% for the 7+3 arm.
VYXEOS also showed benefit in induction response rate with a CR + Cri of 47.7 vs. 33.3 with 7+3 (p-value of 0.016). Response rate is an interim marker of benefit for the drug, supportive with the OS benefit seen and helps reassure patients and doctors that the drug is working. The safety profile of VYXEOS was acceptable and generally similar to that of 7+3 in this patient population.
With this positive data in hand, CPXX is on track to file by the 3Q of this year and expects approval in mid-2017. More details on the timeline are shown below. Since the asset is currently wholly owned, they are looking for a partner for the asset outside the US. We would note that this is of course a natural opportunity to meet with potential acquirers for the overall company.
Market Opportunity and Valuation
According to SEER (http://seer.cancer.gov/statfacts/html/amyl.html) there were 20,800 new cases of AML in the US in 2015. The incidence rate is estimated to be ~18,000 in Europe and 5,500 in Japan. With treatment the median OS of newly diagnosed AML is ~12 months, and those with secondary AML having even shorter life expectancy.
In indication of the Phase III study which looked at patients with secondary AML the market opportunity is ~$200M in the US. The opportunity in the Europe and Japan is smaller at ~$100M and ~$25 respectively due to smaller patient populations and lower pricing.
The current Phase 3 study was in a specific subset of AML. However given the robust data generated in this population it is likely that it will work in the broader population as well. Physicians believe that this coverage and indication can be generated with Phase 2 trials (significantly smaller and cheaper studies).
Biotech companies typically trade at 4-6x EV/Peak Sales. For EV/Revenue multiples for current large and mid-cap biotechs we are at 4-6x as well for out years.
Looking at these multiples for CPXX would imply at $19/share valuation for the current indication, and $42/share for a broader AML opportunity.
Patents for the drug are strong and extend well into late 2020's. In addition they will receive orphan drug exclusivity (additional protection from generics) for 7 years after launch.
Management recently had their employment agreements amended to provide them with an incentive to sell the company. They will now receive golden parachutes in the event of a takeover.