Small Caps | Jun 04 2014
-Owns IP on significant cancer target
-Diagnostic in cancer, heart disease
-Added upside in hair restoration
By Eva Brocklehurst
Cellmid ((CDY)) has a significant target in view – cancer. The company's technology centres on a protein called midkine, known to contribute to cancer, heart disease and inflammation. Cellmid intends to enter the clinic next year with an antibody to midkine as a cancer diagnostic.
A protein is a particularly good cancer target if it is expressed in many different kinds of tumours and not present in healthy people, and if it can be found to play a role in cancer at various stages. Midkine falls into these categories. Antibodies make good cancer drugs because they are specific and have few side effects. Example of such significant drugs in this area are Rituxan, Avastin and Herceptin. This underscores why Baillieu Holt believes there is much upside to Cellmid's potential as an antibody developer.
Cellmid has an antibody it thinks will work particularly well in gastrointestinal and thoracic cancer. Baillieu Holst believes there is substantial evidence backing up claims and there will be strong upside for the stock given the continued demand for new cancer antibodies from the big pharmaceutical companies.
A key difference with Cellmid is that the company has not developed a drug but effectively owns midkine as a target. Cancer treatment is becoming increasingly differentiated, with specific sub-groups of drugs being developed depending on whether the patient reveals certain biomarkers. The company has various early stage revenue opportunities, including licensing agreements with diagnostics developers. One of these is a bladder cancer diagnostic developed by New Zealand biotech Pacific Edge, under licence from Cellmid, that was launched in the US in mid 2013. Cellmid will earn revenue from Pacific Edge as well as from Quest Diagnostics, which has developed a lung cancer diagnostic, and from Fujikara, which is developing a diagnostic for early stage cancer.
Baillieu Holst believes the stock is undervalued and has initiated coverage with a Buy rating, a target of 7c as a base case and 26c as an optimistic case, using a probability weighted discounted cash flow. The broker expects earnings to break even and turn positive in FY15 and assumes the company raises $3m at 2c a share to complete the early clinical work on midkine in cancer. Potential catalysts for re-rating over the next 12 months include a meeting with the US Food and Drug Administration on the anti-midkine cancer program, commencement of phase 1 and II trials and first revenues from Pacific Edge.
Cancer treatment is big business. The broker's modelling uses a 14-year commercial exclusivity period for the antibody followed by a negative 3-5% per annum terminal growth rate, and assumes the cancer antibody is licensed in 2014-2015 for US$10-20m up front, US$100-150m in milestones and 10-14% royalties. Assuming the product launches by 2018-19 the broker models peak sales (year 14) of US$1.7-2.2bn. Baillieu Holst also assumes diagnostics can gain a further US$10-20m in up front and milestone revenue, and models peak sales of US$170-290m with royalties of 5-10%.
Midkine was discovered in 1988 at Nagoya University but was not considered a high priority disease target. The reason no therapeutic possibility was pursued until now is that understanding of midkine has only emerged in the last five years. Cellmid acquired a company called Cell Signals in 2008, which held a lot of the relevant intellectual property, and this provided a library of around 120 midkine antibodies as well as a comprehensive patent portfolio protecting midkine and midkine antagonists globally.
Cellmid believes there is potential for midkine antagonists in inflammation, particularly acute kidney injury and chronic kidney disease, as well as the prevention of surgical adhesions. Midkine is also potentially able to shrink the size of a myocardial infarct. Given the continuing high incidence of acute myocardial infarction and heart failure the broker believes strong partnering interest will emerge for midkine in these indications.
Cellmid also own a small business selling hair restoration products. In 2013 Cellmid acquired the global rights to evolis, a clinically validated treatment for hair loss that works through the inhibition of FGF-5. In 2010 Cellmid had licensed the rights for Australia. The broker believes there is strong upside for the evolis range, with estimates that around 60% of men and 30% of women are affected by hair loss. Cellmid is taking this business to a global footing and seeking distributors in key markets.
Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" – Warning this story contains unashamedly positive feedback on the service provided.
