Endocyte, the SMDC, and the future of clinical oncology...

...or the future of arthritis treatment and cardiovascular disease prevention?

Part Two: The Company's Position


As a reminder, I am long shares of ECYT. 

Not the prettiest girl, but I'll bet she's a late bloomer.

So, I've made the case that ECYT and their SMDC are manna from heaven, sent to cure humanity of all the ills...so why is this this stock trading at less than 10 dollars per share and a market cap less than $300 million?

First, let's go back to March of this year. This is where my interest in ECYT began to be stoked. Endocyte announced a huge double-whammy win at the time, describing how their SMDC drug treatment (vintafolide) for ovarian cancer was given positive opinion for approval from European authorities, and at the same time announcing excellent phase II results from vintafolide in the treatment of non-small cell lung cancer. Shares immediately doubled, and then entered a slow decline as ECYT announced plans to issue more shares to improve their dwindling cash reserves.

Then, the bottom dropped out in early May; ECYT announced a shocking reversal of fortune, with their Phase III trial of vintafolide in ovarian cancer being halted due to a lack of efficacy. ECYT's billion-dollar partnership with Merck was called into question (and then subsequently dropped by Merck), and the entire premise behind the SMDC was called into question.

Investment thesis I: ECYT is near a terminal low

However, I'm of the strong belief that, at this level, the stock is near a terminal low. Do I mean that the stock can't drop below $6.50 per share on the market? No, of course not. However, I do believe that at this level, the ultimate fate of capital invested in the stock will essentially be protected. Why is this? Well, simply put, the SMDC technology that ECYT holds has a ton of value on its own; perhaps after a few years, ECYT strikes out on all of its cancer trials (and other preclinical investigations), is running low on cash, and puts itself up for sale; I have a hard time imagining any sort of company sale for less than $3-4 per share. I am of the belief that a mega-pharmaceutical company (like Merck) would be interested in adapting SMDC technology to their own purposes, and with a greater R&D budget to target multiple preclinical models. Of course, this represents a 50% loss of principal, but considering the possible upside in a small-cap biotech, I'm of the opinion that this is quite attractive.

Investment thesis II: All is not lost

Yes, of course: the failure of vintafolide in a Phase III trial that everyone expected to succeed is a crushing blow to Endocyte. However, a few key facts remain:

1. Vintafolide has been shown to be effective in other cancer models, such as non-small cell lung cancer.
2. As company leadership have described, the imaging-regimen that uses the same ligand (folate) as vintafolide IS effective; it may just require a stronger warhead in the payload than what is currently there to ensure tumor regression.
3. Other folate-linker-warhead combinations are already in clinical trials.
4. A prostate-specific ligand (PSMA) is already in clinical trials with a warhead in prostate tumors.

So, it's not as if Endocyte is being reverted to a preclinical company, with a pipeline that is completely immature and speculative; they still have numerous clinical trials underway, the success of any of which would be enough to carry the company through the foreseeable future. I'm of the belief that ECYT represents a potential huge upside, with a very limited downside according to the innate value of its technology. Heck, as a completely speculative statement, I could even see ECYT becoming a scientific supplier, where they custom design ligand-linker-payloads for precise targeting of payloads to cells for scientific studies. Regardless, I think that the risk/reward ratio of ECYT at its current levels is unappreciated; of course, it is notoriously difficult to value a single-drug biotech stock, but the success of a single drug from the pipeline would be enough to return ECYT to a $1+ billion valuation.





This will end part two, which is my (admittedly short) description of where ECYT finds themselves today. Part three will detail where I see the big potential upside in ECYT, apart from their ongoing clinical trials, and the last point of my investment thesis.

JVS




This is not a trade recommendation, or advice on how to carry out any financial decision.