I am long (CYCC). I wrote this article myself and have not be compensated for it by any party mentioned or unknown.
“We are pleased to report that subsequent to the end of quarter the required number of events have been observed in the study approximately 1.7 years after the last patient was enrolled.”
Spiro Rombotis – August 10, 2016 – 4:30 PM ET – On the Phase 3 (SEAMLESS) Trial
Investing in nano to small-cap biotechnology stocks is hit or miss gambling at its finest. At its finest because unlike a roulette wheel the gambler has an informed, albeit, clouded idea of where the ball will land. The better the idea, or investment thesis if you will, the better your chances are at winning. And should you come across a piece of information that advantages your chances, such as the quote above, you will do better than those who don’t. And while we all might read the same report, or listen to the same conference call, what we comprehend there will be different. And those differences are what separate the winners from the losers in biotech investment.
As previously mentioned in my introductory video, I left Cyclacel Pharmaceuticals (CYCC) for dead back in December of 2014 after having been notified by the company that the Phase 3 (SEAMLESS) trial had crossed the futility boundary and would be unlikely to readout in a statistically significant way. The stock, which had been in steady decline dropped nearly 50% on that day and has not since recovered.
To say that I was surprised when on August 12th, H.C. Wainwright’s analyst Andrew Fein put a price target on CYCC of $173 a share is to understate that by quite a lot. It did, however, get me to thinking about his possible motivations for doing so. Before I address these issues, it should be noted that Fein’s price target is based upon a (SEAMLESS) surprise. His estimate, sans (SEAMLESS) success, is, nonetheless, a lofty $60 per share.
In An Asymmetrical Investment Opportunity The Downside Risk Must Be Limited
And the best way to achieve that buffering is to find an equity which is already significantly undervalued. So, why then is Cyclacel, a biotechnology company in this most lucrative sector of oncology, so steeply undervalued? The answer to this question can be sourced in two ways.
First, if we go to the most recent quarterly report, we find that Cyclacel has lost investors over $329m since its United Kingdom inception in 1996. This birthplace of Cyclacel will be important to our operating thesis and referred to as this article unwinds. In 2007, shares reached a relative value of $600 each. Since then, the company has executed numerous and unexpected equity raises and several reverse stock splits which have undermined investor confidence.
Second, with the cloud of a negative report on the (SEAMLESS) pivotal trial in elderly Acute Myeloid Leukemia hanging overhead, investors are rightfully loath to jump in ahead of that storm. If one already knows that bad news is on the other end of the ringing phone, why pick it up in the first place? That’s logical. But sometimes it’s best to abandon logic in favor of a deeper understanding of what the issues are. Because, in some peculiar instances, the bad news is that you’re just not getting everything you’d hoped for. Only half. I’ll explain that later.
To give you an idea of just how undervalued Cyclacel is relative to other oncology focused developmental biotech stocks, I’ve constructed a comparative graphic for your consideration. Cerulean Pharma (CERU), a company applying its nanoparticle drug conjugate technology to cancer therapy recently suffered a setback in the development of its lead compound CRLX101. In a Phase 2 trial targeting Renal Cell Carcinoma, CRLX101 in combination with Avastin or standard of care (SOC) failed to demonstrate statistically significant benefit against SOC alone. In fact, the control arm outperformed the active arm. Shares of Cerulean were cut by more than half on this day and, yet, Cerulean is still valued 50% higher than Cyclacel.
As you will note in this graphic, Cerulean is nearly 85% dependent on the positive perception of CRLX101 as a measure of its importance to the developmental pipeline. Yes, there are other opportunities when pairing this compound with existing therapies but that is cause for concern when assessing the potential commercial value of the asset moving forward. Contrast this with Cyclacel’s pipe which features a good mix of attractive candidates including a CDK inhibitor; a variety of MOA’s; and addresses a good mix of therapeutic populations and you are left to the inevitable conclusion that Cyclacel’s real worth has yet to be unearthed. In fact, it is my considered opinion, that were you take sapacitabine out of the mix entirely; rename Cyclacel as, for instance, AdromedaBio; and launch the company within the framework of a fresh IPO, the resulting market-cap would reach in excess of a quarter billion dollars. And yet, here we sit at $20m.
Fein’s Price Target On A (SEAMLESS) Homerun Could Be Way Off
In the world of greed that is Wall Street banks and biotech companies, we must always speculate on the motives of sell-side analysts in establishing what to casual observers might be fantastical price targets. In the already referenced Q2 2016 report, we can clearly see that Cyclacel entered into an At Market Issuance Sales Agreement with FBR Capital Markets & Co. on June 23, 2016 to sell $4m worth of the company’s common stock. To suggest that Fein’s comments which led to a $3.43 or 64% climb in the share price over 3 market days didn’t open the door to executing on that ATM agreement would be to bury one’s head in the proverbial sand. While not knowing the specifics of this particular contract, ATM’s are usually structured so that the investment bank (FBR) buys shares at the lowest price within a specified period of time and is thereby able to sell them later for a sizeable profit. That speculative bit of expedience noted, let’s see if we can’t find some logic in Mr. Fein’s generous assessment.
The Long Tail Of The Sapacitabine Kaplan-Meier Curve
In my last, and most critical, article on Cyclacel published June 10, 2014 I included the following graphic provided by the company depicting a long tail to the Kaplan-Meier curve.
And here is what the clinical trial leader of the (SEAMLESS) study, Hagop Kantarjian M.D., said at Cyclacel’s presentation regarding the shape of that curve.
You know, we’re noticing this in the long-term follow-ups, because people say there are no cures but when you look at the long-term follow-up of the frontline, and Dr. Manero makes that point, there is a tail to the curve which is in the range of 10 – 20%, even without the transplant. And these are patients who continue therapy. So it is possible. He makes that point consistently and people just dismiss it, but there is a tail of the curve with hypomethylating agents, even in the frontline setting. So it’s possible that maybe in the salvage set that that’s what we’re seeing in that context with sapacitabine. That is, there could be a population of patients that’s more sensitive to a particular drug where they stay longer on it.
So essentially, what is being said is that patients who respond well to sapacitabine tend to respond very well. They live considerably longer creating a longer tail to the curve. This is important because, unlike other molecules in other studies that may have crossed the futility boundary early, sapacitabine in the (SEAMLESS) setting may have been late to separate from control. This study was supposed to have concluded in late 2015. But the final events (deaths in both arms) didn’t happen until early in Q3 of this year. Please go back to that first quote from Spiro Rombotis and reread it carefully.
The above graphic examines only 3 doses of drug and does not compare it to a control. However, we can clearly see that early disappointment in survival by the majority of patients is met with encouraging longevity later. I’m not saying that this will be enough to overcome an inauspicious start but I am saying that hope is still alive and in biotechnology investing that sentiment is meaningful.
Sapacitabine Remains Desirable If Only Because Oral Administration From Home Is Preferable To Intravenous Delivery In A Hospital
The population of patients in the (SEAMLESS) pivotal trial is age 70 and above. Their constitutions don’t lend themselves to transplants or chemotherapeutic regimens that often save the lives of younger patients. Many choose to simply die as peacefully and painlessly as possible in hospice settings. Consequently, providing a milder treatment option that can be taken from home would be attractive to this sick and needy patient population.
Decitabine, commercially named Dacogen, was first approved by the European Medicine Agency on a failed Phase 3 trial (DACO-016) and is currently standard of care in elderly AML. In the (SEAMLESS) trial, Dacogen is used alone in the control group. This will give both the EMA and FDA their first look at the actual performance of decitabine in the clinical setting since 2011. If sapacitabine, an orally administered alternative to Dacogen improves upon patient outcomes, both primary and secondary, even without being statistically significant, there is still a possibility that Cyclacel, originally a European company, could gain commercial approval there. A nod in Europe would make access in the United States to sapacitabine almost mandatory on a patient-provider basis.
Additionally, Cyclacel is in ongoing conversations with the EMA to open the door to investigational trials involving sapacitabine in the pediatric population. Positive trends in (SEAMLESS) will, no doubt, widen possibilities there as well.
Cyclacel is perhaps the least promotional company in biotechnology today. Among the many that I’ve followed, Cyclacel is the least likely to toot its own horn. And while, selfishly, I wish this weren’t so, I can appreciate the integrity of that approach. Regardless, CEO Rombotis mentioned several upcoming catalysts that could drive the price higher.
- (SEAMLESS) Phase 3 data report in Q4 2016
- DNA Damage Response Program (Seliciclib + Sapacitabine) Progress Phase 1 Extension Cohort in a breast cancer patient population enriched for BRACA mutations
- CDK Inhibitor Program (CYC065) Report topline results of the Phase 1 trial in patients with solid tumors
- Investigator Sponsored Trials in Rheumatoid Arthritis and Cystic Fibrosis Report data when made available
It should be noted that recent and prior data readouts from some of the aforementioned trials were very positive with stock surges in excess of 50%.
Cyclacel is becoming somewhat of the lovable loser on Wall Street. Once thought to be underwhelming, the company’s early stage pipeline is showing signs of efficacy and gathering investor interest. (SEAMLESS) remains an eyebrow raising study that could open the doors to commercial approval in the EU even without demonstrating statistical significance on its primary endpoint of overall survival. And while Andrew Fein’s outrageous price target of $173 per share on a (SEAMLESS) homerun might be the most eyebrow raising of all, it too could be a lowball estimate should that dream come true. How much of the AML and off-label MDS market could sapacitabine capture is unknown. While my estimates are considerably lower than others, I’m no expert on this or any other subject. Many qualified assessments run as high as $500m. Should that be the case, Cyclacel would fetch a market capitalization of roughly $2b.
I’ll leave it to you and your calculator to do the math.
Always be well…
Additional disclosure: Any information or opinion expressed herein may not be true, accurate or correct and it does not constitute any suggestion to buy, sell, hold or adopt any investment strategy for this stock or any stock that may be mentioned. Reliance upon information in this article is at the sole discretion of the reader. The sole purpose of my article is to entertain by providing information, the accuracy of which is as good as the public sources it was derived from. Do not act on anything I have written. Rather, do your own due diligence and consult an investment professional before making any investment decision. Acting on what any one writer, including me has imparted to you is foolish at best. I have no better access to resources or gift of opinion formulation than you do. I sometimes make mistakes. There are a myriad of things, which can happen in lieu of any forward-looking statement I have made. Any stock featured or mentioned in an article I compose is subject to all manner of influences, which can change its value in dramatic fashion upwards or downwards. These events can be of a wide variety not limited to news-related occurrences, managerial decisions, trial failures, stock manipulations and so on. I make every effort to declare positions I have in stocks I cover or mention in an article but reserve the right to move in and out of said investments at my own discretion based upon the wisdom of doing so. I implore you to do your own due diligence, invest at your own considerable risk attaining the just reward your efforts have wrought.