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

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

Part Three: The Future, The Bull, and the Arthritic Arithmetic

I disclaim: I am long shares of ECYT. 


As a reminder, you can find parts one and two of this series here and here, respectively. We left our story in Part 2 with Endocyte in a bind: a failed Phase III clinical trial on their lead compound, the loss of a $1 billion partnership with a world-leader in drug development, and a plunging price per share. However, I outlined what I believe are a few potential pluses of the stock at this level: the limited downside of the stock due to the value of Endocyte's SMDC technology, and the potential for success in the company's other clinical trials. Today, I want to talk about the company's most immature preclinical product, which I believe holds greater potential upside than its cancer applications: anti-inflammation.

A macrophage, being all inflammatory.
You know how they get. Source.

Inflammation is one of the boogeymen of modern medicine, and for good reason. The ultimate purpose of an inflammatory response is, of course, to enable the immune system to activate and attack invading insults; to this end, our immune system is exquisitely sensitive, tuned, and regulated. However, as in every other organ system, things can go wrong; in the case of inflammation, you're probably well aware that damaging runaway inflammation causes a disease which affects nearly 1/4 of adults in the United States: arthritis.

The immune system is comprised of a number of different types of cells, each of them being vital to the function of immunity. However, the macrophage (pictured above) is one of the chief players in driving inflammation. Macrophages have a few different functions in the immune system. One of their functions is to act as a sort of garbage man in the immune system, picking up or degrading anything that shouldn't be around them in the tissue. Another function of macrophages is their ability to drive inflammation by secreting cytokines and hormones that both locally and systemically activate the immune system.

Both of these functions of macrophages have been implicated in rheumatoid arthritis: after the rheumatoid process begins (through an autoimmune issue), macrophages begin to drive the accumulation and activation of other immune cells. Additionally, they begin to release factors that directly contribute to arthritis, and start chewing up and digesting healthy tissue in the inflamed joint. Accordingly, a number of studies have shown that targeting macrophages (through a variety of different methods) can improve arthritis in various models; of course, these studies are difficult to translate to the clinic because they are more proof-of-principle (one of the models is to give a compound that destroys macrophages throughout an organism, which is of course useful for slowing down arthritis, but deletes a very important piece of the immune system). Currently, there are few effective treatments for arthritis, and none that can cure the eventual destruction of the tissues of the joint; most of them center on either lifestyle modification (losing weight can help reduce the stress on joints), or giving anti-inflammatory painkillers to both reduce the progression of the disease and help control the pain.

Investment thesis III: Endocyte's biggest upside is still in their preclinical models

It is my opinion that the ability for Endocyte to target inflammatory diseases like arthritis could be their most lucrative, and effective pharmaceutical. Using the same ligand (folate) from their anti-cancer trials, Endocyte has developed an SMDC that delivers aminopterin (an immunosuppressant) to activated macrophages, which express the folate receptor. This allows for the same advantages that were present in the cancer trials that I discussed, with one additional benefit in the case of arthritis: the SMDC can be delivered directly to the site where it needs to act, by an injection right into the joint. This allows for even greater chance of success, as the drug is already right where it needs to be, using procedures that orthopedic surgeons already use frequently in the clinic (with steroid injections). Additionally, although Endocyte's current efforts are using immunosuppressants, it would also be possible to use some of their other, more potent payloads that cause actual cell death in these activated macrophages.

Finally, these same principles can be applied to any of a number of macrophage-involved inflammatory diseases, such as atherosclerosis, heart disease, or type 2 diabetes. However, I believe arthritis will be the best target, since there are already a number of highly effective treatments for these other diseases (like statins, insulin, or metformin), while there are very few for arthritis; additionally, the aging baby-boomers are only going to increase the need for effective arthritis treatments.

Of course, the anti-inflammatory applications that Endocyte is investigating are still in the preclinical phase, and it is always risky to invest based on these highly speculative efforts that aren't even in Phase I clinical trials yet; however, it's my belief that the upside here is too great to ignore.

Thus, I am adding Endocyte at its current price per share (6.65) to my model portfolio.




This ends my series on Endocyte. I hope it was as educational for you as it was for me. Let me know what you think, and what I can improve on. Happy Investing!

JVS



This is not a trade recommendation, and should not be construed as financial advice.