TopoTarget – High Time to Double

2011-01-15 14:21, Edited at: 2011-03-11 06:04

Lets face it, most indicators tell that belinostat will be on the market as soon as 2012. Given that the drug targets a multi-billion dollar market in combination with improved investor relations acting as catalyst, it is high time for a positive attitude towards belinostat, the company and the growth in market value. Recent calculations on company value supported by major interest in the field from a number of larger pharmaceutical companies clearly demonstrate a tremendous upside. A doubling in market value within the nearest time is likely.

Belinostat - a Potent Anticancer Drug Demonstrating Broad Applicability

TopoTargets drug pipeline comprises six different substances or families of compounds. Among these, Totect is the only one on the market and is approved for the treatment of tissue damage that may occur when a drug used for chemotherapy by accident goes into the tissue or leaks outside the veins. APO866, mTOR, Zemab and APO010 represent all drug candidates with substantial potential at different stage of development. Zemab for example, has shown promising efficacy in the treatment of breast cancer, a so-called blockbuster indication implying annual sales exceeding 1 billion US dollars (BUSD). However these candidates may well contribute significantly to the cash flow in due time, their potential with respect to development stage are dwarfed by that demonstrated by belinostat, TopoTargets lead candidate.

Belinostat has shown an excellent efficacy for a number of cancer indications as well as a good safety profile and low bone marrow toxicity which implies that the drug has a broad applicability within cancer therapy. The drug is in late stage development with close to 800 patients treated so far. Simply put, belinostat is a single drug but the wide applicability implies that it should be viewed as a well diversified pipeline.

NCI Collaboration Proof of Drug Potency and Potential

Belinostat is current being studied in 19 clinical trials of which 11 are sponsored by U.S. based National Cancer Institute (NCI). However it is not the only substance being under NCI investigation, the sponsorship should be viewed as proof of the potency and potential demonstrated by the drug. The collaboration is of a win-win type for TopoTarget as these studies are funded by the NCI and that the company may use study data for registration purposes. Although this adds reliability to the belinostat potential it should be noted that the studies conducted by the NCI to a large extent employs belinostat as second- or third line therapy which generally reduces the treatment response due to increased resistance towards chemotherapy. This effect is not specific for belinostat but is a general rule for all drugs being used within cancer therapy.

Company Strategy to Accelerate Development of Belinostat

Three of the indications targeted by TopoTarget for belinostat approval in neartime are particularly noteworthy and will accordingly be in focus in this analysis: peripheral t-cell lymphoma (PTCL), carcinoma of unknown primary (CUP) and non-small cell lung cancer (NSCLC). This opinion is based on PTCL likely being the first approved indication for belinostat and although the latter indications are farther from market approval, they represent blockbuster indications which combined with strong rationales for belinostat demonstrating efficacy imply fair chances of tremendous profit for the investor.

With the aim of a rapid market entry for belinostat, the company is currently re-structuring the organisation to streamline and accelerate the development process. This was initiated in 2010 and the company has since then employed a few key persons within the management where the most notably and perhaps most important event here is the recruitment of Dr. Francois Martelet as CEO in early 2010. He is a M.D. by background and has a strong experience in late stage development and commercialisation of drugs where he, for example, took part of in the global launch of Zolinza (vorinostat), a HDAC inhibitor like belinostat, during his position at Merck & co. Together with the remaining management, the board of directors and Dr. Jean-Louis Misset as chairman of the global advisory board, TopoTarget houses an impressive internationally recognized expertise on all levels of drug development and commercialization. With regard to this, it is very unlikely that the development of belinostat will be faltered due to events that may give a hold on such progress for less experienced managements.

With Dr. Martelet as CEO, TopoTarget started during 2010 to evaluate the prospect of the remaining pipeline, including Totect. In the Q3 2010 report, it can be seen that the fate of APO866 remains to be decided and depends on study data which are expected to emerge in H2 2011, APO010 and mTOR are to be ceased from internal development and the company seeks currently for out-licensing opportunities or similar whereas Zemab will continue to be developed by TopoTarget and eventual partner. A more comprehensive update on the commercialization strategy is to be presented during Q1 2011.

Strong Cash Assets Due to U.S. Partner Deal in 2010

One of the most important events in 2010 was the deal with the U.S. based pharmaceutical company Spectrum Pharmaceuticals (Nasdaq ticker SPPI) regarding development and commercialisation of belinostat in North America and India which also includes an option for China. The potential value of the deal is 350 MUSD and TopoTarget received 30 MUSD in cash upfront, which together with the assets of that day was estimated to be sufficient to cover operational expenses into Q2 2012. Further, the deal ascribes the ongoing PTCL study to be 100% funded and driven by Spectrum whereas TopoTarget takes a similar responsibility for the ongoing CUP study. Regarding future development of belinostat for other indications, the deal prescribes such costs to be split in a 70:30 ratio for Spectrum and TopoTarget respectively.

Concerning future cash flow, which is of significant importance for company valuation, TopoTarget will receive double-digit royalties from sales of belinostat as well as receive milestones when certain sales have been met. However the exact number is yet unknown, it has been indicated that the royalty is extremely generous which given the late stage in development makes it reasonable to believe that it should be at least 20%.

Currently, the company has no partner for the European and Asian markets but because of the strong financial situation there is in no rush due to money shortage. Whether they will out-license these areas to a partner or establish sales teams on their own, an option that may be more rewarding but also riskier, remain to find out. In any case, it appears that the company have all opportunities to sign a lucrative deal should that be the choice.

Belinostat for Peripheral T-Cell Lymphoma Likely on Market 2012

Belinostat is currently being evaluated in a registrational trial as monotherapy against peripheral t-cell lymphoma (PTCL), a rare but serious disease affecting ~12000 people annually. In a previous phase II study for this indication, the overall response rate (ORR) was 32% out of 19 patients. For the ongoing study, TopoTarget has a special protocol assessment (SPA) from the U.S. Food and Drug Administration (FDA) stating that the ORR must exceed 20% for 100 patients treated. Although the previous study induces some uncertainty regarding efficacy due to the limited number of patients, the efficacy demonstrated so far (32%) strongly suggest that 20% as requested by the SPA will be met. The study is driven 100% by Spectrum and the CEO Dr. Rajeh Shrotriya recently expressed orally in January 2011 at the 29th Annual J.P. Morgan Healthcare Conference that enrollment is expected to be complete in H1 2011 and that a new drug application is expected to be filed later this year. With regard that belinostat has a fast-track status for this indication the drug may be on the market as soon as 2012. Peak market sales of belinostat is estimated to reach 100-130 MUSD annually if approved for PTCL [1].

Strong Rationales for Success in BUSD Markets CUP and NSCLC

Carcinoma of unknown primary (CUP) is a heterogenous disease with a poor prognosis affecting ~83000 people annually. Due to evidence of enhanced clinical activity in patients with solid tumors when belinostat was added to the standard-of-care drugs carboplatin and paclitaxel, this combination (BelCaP) is currently being evaluated in a randomized phase II study embracing 88 patients. Encouragingly, clinical activity has also been seen in heavily pre-treated patients when treated with this BelCaP combination. Patient recruitment was completed by the end of 2010 and the company expects top-line results of progression-free survival and response rate in Q3 2011. The competitive situation is promising with no drug yet approved for CUP however also Erbitux (Cetuximab within Europe, owned by Merck & Co.), Zortress (Certican within Europe, marketed by Novartis) and Avastin (owned by Genentech/Roche) are also being investigated for this indication. Peak market sales of belinostat are estimated to reach 1.2 BUSD annually if approved for CUP [1].

Non-small cell lung cancer (NSCLC), with ~373000 persons being affected each year, is one of the largest cancer indications. Because drug approval for this indication may be extremely rewarding drug development within this indication is also very crowded. In similarity to the approach to treat CUP, there are also strong rationales to treat NSCLC by combining belinostat with existing standard-of-care treatment such as CaP. Must notably, in a recent proof-of-concept study when Zolinza (vorinostat) was added to the CaP combination, the response rate of the Zolinza+CaP arm was 34% which should be compared to 12.5% displayed by the reference [2]. However was the toxicity of the combination found to be non-manageable and therefore must the dosage of Zolinza be reduced should this combination be further considered for this indication, a condition that certainly will decrease also the efficacy. In contrast, the BelCaP combination has shown to be well tolerated also when delivered in full dose which suggests a large probability to demonstrate efficacy as well as to exhibit a good safety profile while being used to treat patients suffering from NSCLC. Using similar cost values as for the CUP market, peak market sales is estimated to ~5.4 BUSB annually if approved for NSCLC.

Belinostat’s Safety Profile Major Advantage in HDAC Inhibitor Landscape

It exists roughly a dozen other HDAC inhibitors that should be viewed as competitors to belinostat. Most notably and farthest developed are Zolinza (vorinostat), Istodax (Romidepsin) and Folotyn (Pralatrexate). Zolinza, which is owned by Merck & Co., is approved for the treatment of cutaneous t-cell lymphoma (CTCL) in similarity to Istodax, owned by Celgene Corp. Folotyn, owned by Allos Therapeutics, is approved for PTCL which also is a target indication for belinostat.

In contrast to efficacy being the most important factor for a drug being a successful competitor in monotherapy provided a manageable safety profile, side-effects and toxicity have a pronounced stronger influence on however the same drug would become a successful competitor as part of a drug cocktail. Simply put, this is because added side-effects and increased bone marrow toxicity, which may result from such combinations, may imply non-manageable safety conditions which overweight any increase in efficacy. Belinostat has shown to be well tolerated in mono- and different combination therapies, for example when added to CaP, also when delivered in full dose.

Belinostat, Istodax and Folotyn exhibit similar efficacies while being used to treat PTCL but they display different safety profiles. For example, it has been found that 6% of the patients experienced thrombocytopenia (increased risk of bleeding due to reduced number of blood platelets) when treated with belinostat which should be compared with 27% and 32% of those treated with Istodax and Folotyn respectively. 13% experienced neutropenia (increased susceptibility to infections due to a reduced number of white blood cells) which should be compared with 54% and 20% of those treated with Istodax and Folotyn and finally 0% (!) experienced mucositis (inflammation of the mucous membranes) which should be compared to 70% of those treated with Folotyn. However these data are not from a direct comparison study, see reference [3] and references therein, they certainly support that treatment with belinostat to a lesser extent causes negative side effects than do the others.

Added to the fact that belinostat is the only HDAC inhibitor that can be administered orally, intravenously and continuous-intravenously which allows for flexible treatment options, belinostat certainly appears to have a major advantage over its competitors in safety profile when targeted for combination therapy.

To push this aspect a bit farther into the future, the process to rapidly design efficient drug cocktails for cancer treatment, as successfully has been done to treat for example patients infected by HIV, has recently gained attention both from pharmaceutical companies as well as governmental agencies. Instead of developing and trying to gain approval for a drug one-by-one U.S. based FDA has recently (December 2010) issued draft guidelines for companies wanting to combine two or more drugs into one therapy and final guidelines are expected in Q3 2011. Streamlining FDA review of drug cocktails is estimated to shave off roughly five years of development time and is a good step towards solving the cancer enigma. To which extent this will influence also the belinostat development progress remains to find out however it is clear that the safety profile has a key value also in this context.

Impressive Upside in Market Value When Comparing to Istodax and Folotyn

An event that strongly supports HDAC inhibitors being viewed as important drugs for cancer treatment is the Celgene Corp. acquisition of Gloucester in a deal worth 640 MUSD in late 2009 considering that the deal was made possible solely due to the Gloucester ownership of Istodax. Also, considering that Allos Therapeutics market value is currently 443 MUSD (2011-01-07) in where Folotyn is the primary drug supports this. Finally, also Merck & Co. has put significant resources on the development of Zolinza however the exact amount is unknown.

Re-Evaluating the Spectrum Deal: Both Strategic Winners

With regard that belinostats main advantage appears to lie within the opportunity to be combined at full dose with standard-of-care therapy, such as the CaP combination, it strongly suggests that Spectrum made a good deal when licensing the drug. That is, by offering 350 MUSD which roughly equals the value of PTCL, provided that Istodax and Folotyn are reasonably valued and that belinostat remain to be out-licensed for the European and Asian markets, they got access to the larger markets almost free-of-charge. That this really was the cause for Spectrum to partner is supported by an oral statement by the Spectrum CEO Dr. Rajeh Shrotriya during Jefferies 2010 Global Life Sciences Conference:

- “Our third drug is Belinostat, a novel HDAC-inhibitor, which we believe, could become the 'backbone in cancertherapy'. And let me say why, I say this: With all the advances in oncology Paclitaxel and Carboplatin have proven to be the 'backbone of chemotherapy'. And we believe that Belinostat can be combined in full doses with Carboplatin and Paclitaxel and achieve better responses.”

With the main market for belinostat lying beyond PTCL in mind it also becomes evident that the TopoTarget strategy was not to sign a deal with an apparently large direct value but to rather sign a deal with a large royalty which is more lucrative would belinostat be available for the mass-oncology market. From that perspective, the upfront is sufficient to cover operational expenses into 2012 and perhaps longer if milestones related to for example NDA filings are released, but more importantly to give TopoTarget a stronger financial position for negotiations regarding the European and Asian markets. Considering that the royalty rate from sales of belinostat is indicated to be extremely generous it also appears that TopoTarget made a good deal. That said, both Spectrum and TopoTarget were the strategic winners in this deal.

Low Market Value Due to Fund Termination

In 2009, the former major share holder BankInvest decided to terminate its exposure towards the biopharmaceutical sector, likely due to an internal crisis following the financial crisis. Since them, the fund has sold a large amount of TopoTarget shares, perhaps as much as 20 million, to the market with a clear negative impact on the market value. Important is that these sales have been non-company-specific and also shares held in other companies have been dismantled. Additionally, the negative impact on the market value has most likely been boosted due to technical aspects of the share value evolution as the majority of TopoTarget shares are being held by minor owners.

New Director of Investor and Public Relations Promises Value Delivery

In the end of 2010, it became clear that TopoTarget seriously aims to improve investor and public relations through the employment of Annette Lykke, who is to shoulder the role as director of investor and public relations from the turn of the year 10/11 and ahead. Based on her professional profile, she appears as perfectly suited both to attract major investors as well as to establish reliable communication channels with the shareholders. That is, to clearly demonstrate the intrinsic values residing within TopoTarget for an audience as large as possible.

That TopoTarget now put resources in improving also this aspect of the company development clearly supports their ambition to also increase the market value. Given that it has been expressed by the CEO Dr. Francois Martelet that the aim is to become a Mid-cap pharmaceutical company within 2011 this is certainly a step in the right direction [4].

Two Recent Calculations Demonstrate Impressive Upside in Share Value

During the last six months, two analyses targeting the company value have been published and the key results are presented below with a brief comment. In the context of this analysis it should be observed that the first was published before the company issued the news regarding the employment of a new director of investor and public relations. In chronological order:

‘Betting on belinostat’ by Edison investment research (September 10, 2010):

This outlook contains an overview of the company and the pipeline with the emphasis on the long-term investment horizon. It clearly suggests that the largest part of the pipeline currently resides within belinostat and emphasises that the niche indication PTCL is primary targeted exclusively for rapid approval of the drug whereas the main market lies within the larger indications such as CUP and NSCLC. This is also an underlying score in the evaluation part where it ascribes the pricing of belinostat to be of significant importance should the drug be positioned for the mass-oncology market or for niche indications. Using a sum-of-the-parts discounted cash flow approach (SOTP DCF) TopoTarget was valued to 994 MDKr (7.5 DKr per share) for the development level at that time and it also forecasts that belinostat will generate peak revenues of 1.2 BUSD.

‘Topotarget: mellandagsreans bästa köp?’ by ’Drule’ (December 28, 2010) [5]:

Freely translated to ’Topotarget: Christmas sales best buy?’, this analysis comprises an overview of the company and incorporates a rather extensive company evaluation part based on a SOTP DCF approach. In similarity to what was concluded in the Edison outlook also this analysis points out that there are some parameters that have a significant impact on the company value such as royalty, discount rate and market penetration. By employing a standard set of parameters, the calculated value was found to equal 14.6 DKr per share assuming no tax expenses and 10.9 DKr for tax included at the publication day. The sensitivity analysis reveals further an impressive upside from these numbers should for example the royalty be larger (19.0 DKr per share at 25% royalty) or increased market penetration for NSCLC (17.8 DKr per share for 10% market penetration). In total, 72 different deviations from the standard set of parameters are presented with the outcome of calculated share values ranging from 6.7 DKr to 26.1 DKr.

Comments: Both analyses conclude that it is a tremendous upside in the share value both in the longer investment horizon as well as within the nearest future given the belinostat pipeline and development stage. Encouragingly from a risk perspective, this is also the case should the royalty and market penetration be lower than expected.

Evaluation and Recommendation

True, TopoTarget has a strong pipeline within belinostat and the drug will likely be on the market as soon as 2012. True, there are no reasons to believe that progress in development will falter due to inexperienced management. Further true is that the currently low market value would not be the situation was it not for previous massive sales from BankInvest and true, plenty of value-triggering news are expected during 2011. Finally true, recently initiated effort to attract investors and improve communication will act as catalyst in the process of demonstrating the intrinsic values residing within the company.

It exist a number of reasons to believe that the turn of the year 10/11 will spark a rapid increase in market value and I estimate that the share will be worth 7.5 DKr, i.e. roughly twice the current value, by the end of Q1 and reach 12-15 DKr by the end of the year.

The recommendation is BUY with a target price of 7.5 DKr by the end of Q1 2011 and 14 DKr by the end of 2011.

/Dr Linn Baal

References

[1] TopoTarget Investor Presentation, Oslo, Nov 2010

[2] Ramalingan et al., Journal of Clinical Oncology, 2010, 28,1

[3] Spectrum Pharmaceuticals presentation, San Francisco, 2011

[4] Article in BioPharmaceutiques, 2010

[5] published at www.redeye.se