Celldex Therapeutics: Can an Orphan Program Create Larger Gains?

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Celldex Therapeutics (NASDAQ:CLDX) has been one of the best performing biotechnology stocks of the last two years. Since January 2012, gains have reached 700 percent as Celldex has established itself as a clinical leader in the development of cancer therapeutics. However, what’s really exciting is that Celldex might be preparing to make a move in treating orphan disease and, if successful, this could catapult Celldex to a whole new level.

24 Months to Remember

If we reflect on the last two years and the cause for Celldex’s 700 percent gain, it has been developments surrounding the company’s brain cancer drug — Rindopepimut — and its breast cancer drug — CDX-011 — that has led to such large returns. Rindopepimut is in Phase 3 testing to treat glioblastoma multiforme, which is a very aggressive form of brain cancer where the life expectancy is about one year post-diagnosis. Last August, Celldex increased the size of its Phase 3 trial from 95 to 170 total patients due to early signs of anti-tumor activity. Then, in November the company presented an interim look at its trial, showing a 4.1 month improvement in overall survival compared to the control group.

Still, much data is needed to label Rindopepimut a guaranteed clinical success; but because of data with CDX-011, investors have given Celldex the benefit of the doubt. CDX-011 was tested on patients exhibiting a protein called GPNMB, those who were no longer responding to other treatments (at least three failed). In this very difficult patient population, CDX-011 produced a 33 percent response rate compared to 0 percent in the control group. Moreover, overall survival increased by seven months, essentially solidifying its place as an effective drug.

How’s Celldex’s Valuation Figured?

Clearly, with the data above, Celldex is well on its way to producing large annual revenue… but how much? According to analysts, CDX-011 could earn $600 million and Rindopepimut could exceed $1 billion in worldwide revenue. With a $2.1 billion market cap, Celldex trades at 1.3 times peak sales on its two lead drugs. Currently, the drug industry trades at 3.4 times sales, which implies upside of nearly 300 percent from Celldex’s current price, based solely on the fundamentals of its two key programs.

Looking Deeper in the Pipeline

While CDX-011 and Rindopepimut have been great value drivers for Celldex investors, the company also has a robust pipeline that could spark the next wave of gains. One such program is CDX-1135, a complement modulator that’s being studied to treat an orphan condition called dense deposit disease. Currently, the company is testing CDX-1135 in a pilot study, but positive results will move it quickly into a late-stage trial. Already, in a study of mice, CDX-1135 showed a controlled (the component) C3 in mice with damaged kidneys, an outcome that no other drug had ever produced.

A complement modulator is not a type of drug that you hear referenced often. These are drugs that bind to certain components, those that prevent the destruction or removal of invading particles created by the immune system. If not for this function, rare and life-threatening diseases are often created, and if these components are not regulated, the diseases get worse and often cause death.

The most popular complement modulator is Alexion Pharmaceuticals’ (NASDAQ:ALXN) Soliris, a drug that treats rare blood and genetic disorders. Currently, Soliris is FDA approved to treat the life-threatening genetic disorder atypical hemolytic uremic syndrome and the blood disease paroxysmal nocturnal hemoglobinuria. Moreover, Soliris is being studied in five additional clinical trials; if proven successful in all studies, peak sales of the drug could reach $5 billion worldwide.

Soliris works by binding to the C5 component, which has been linked to several diseases. This fact is important to Celldex because CDX-1135 works the same way as Soliris, but binds to C5 and the C3 component. Hence, there is reason for some to suggest that CDX-1135 could directly compete with Soliris, and possibly be an even better drug in treating some diseases due to the binding of an additional component.

In fact, Alexion actually tested Soliris on DDD in early trials – had very little effect — and has since not pursued a larger trial. With that said, DDD is not a great fundamental growth driver for Celldex, but the collection of other indications and off-label uses could make CDX-1135 another blockbuster in the company’s pipeline.

To put in perspective just how meaningful CDX-1135 could become for Celldex, consider the fact that Soliris has earned sales of $1.32 billion over the last 12 months, and Alexion trades with a market cap of $26 billion. In other words, the market believes Soliris is worth 18 times its current sales. Therefore, if Celldex can prove that CDX-1135 is effective in treating DDD, the company might begin to test it on other rare diseases. If so, CDX-1135 will likely be a massive driver of gains for many years to come, supporting a market capitalization significantly higher than $2.1 billion.

Final Thoughts

Celldex was guiding for data on its CDX-1135 pilot study in late-2013. Yet, here we are in 2014 and still no data. Hence, investors should expect data in the near future, or any day now. Granted, it is possible that CDX-1135’s data is insignificant, and at that point the company will likely cease further testing on the product. However, what’s encouraging about this possibility is that most of Celldex’s valuation is directly tied to the performance of CDX-011 and Rindopepimut, as neither investors nor analysts ever mention CDX-1135 in their valuation assessments of Celldex.

Additionally, what’s really impressive is that this small clinical-stage biotech is not only succeeding in treating cancer, but has crossed the line to orphan disease, a feat that not many have accomplished with any level of success. This fact might be another reason for investors to be bullish on Celldex, as its diversity could present some level of security for the stock. Thus, CDX-1135 will likely become a huge catalyst in the near future, one that shouldn’t weigh too harshly on the stock if negative, but could produce long-term gains if positive. As a result, keep your eyes on CDX-1135.

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