Is This Rally Close to Over?

Sherrie is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

I, for one, have been on the Celldex Therapeutics (NASDAQ: CLDX) bandwagon since December 2012. It was at this time that the outlook for Celldex changed from being a speculative biotechnology company to a real player in the cancer immunotherapy space with the clinical success of its breast cancer drug CDX-011.

CDX-011 has created a lot of excitement, and rightfully so. It is successfully treating patients who have failed multiple breast cancer treatments and has peak sales potential in the neighborhood of $700 million annually. However, investors seem to have forgotten about its other late-stage candidate, which is a drug that has just as much promise in the market, rindopepimut.

Don’t forget about Rindopepimut

Rindopepimut treats one of the most deadly cancers known, glioblastoma multiforme (late-stage brain cancer), a disease where very few live one-year after being diagnosed, and virtually no one lives three years.

Yet, last year the company presented three-year post Phase 2 data and the drug produced a median overall-survival of 24.6 months (average live time) with 26% of patients still alive after three years.

Rindopepimut targets a certain expression from the cancer, called EGFRvIII-positive, an expression that is estimated to be found in 30% of patients. Initial analysis pegs peak sales at $300 million, using current glioblastoma drugs as a guide.

However, that is a bit unfair, because current FDA approved glioblastoma drugs don’t really work. There are two drugs approved to treat the disease: Merck’s (NYSE: MRK) Temodar and Roche’s (NASDAQOTH: RHHBY) Avastin.

Temodar is a chemotherapy agent that added just 2.5 months of life to the average survival of patients. Although, I believe it was a matter of luck. This is a drug that actually increased the size of the tumor in 10% of patients, showing no effectiveness on treating the progression of the disease. Therefore, its effectiveness is questionable.

Avastin is used to treat several cancers, but does little to help glioblastoma patients. Unlike Temodar, Avastin did shrink tumors, but did absolutely nothing to improve overall survival in patients.

More Potential Than You Think

The point I am making is that with no good treatment alternatives for glioblastoma, it is really hard to get an idea of the potential market. If analysts project the potential market at $1 billion based on Temodar and Avastin -- $300 million peak sales for rindopepimut by targeting 30% of market – then you have to account for the fact that rindopepimut patients will be taking the drug twice as long as patients on Temodar or Avastin, due to living longer.

With Temodar and Avastin, patients die in a year, but with rindopepimut, most live two years, and 26% live three years. Thus, the potential market becomes larger as patients use rindopepimut longer. As a result, to be conservative, let’s remove the 25% of patients who live three years, and just use the two years of life (not one) that rindopepimut will give to patients. Under these circumstances, rindopepimut has peak sales of $600 million conservatively, meaning it is equally important as CDX-011.

A great acquisition target

So, what does this mean for the investment outlook? It means that Celldex is trading at just 1.25 times peak sales and still has a massive pipeline to develop. It means that Celldex still presents a great deal of upside with big pharma trading at 3-5 times sales. It also means that Celldex is a near certain acquisition target.

Moreover, I think either Roche or Merck will be the companies to try and acquire Celldex. Roche is the global leader in vaccinations and in cancer therapeutics. It already has Herceptin, which is the best-selling breast cancer drug on the market and accounts for almost 15% of its total sales. Roche could easily integrate CDX-011 into its network and most likely exceed peak sales. Then, with its large network, and already having a glioblastoma drug, it could also integrate rindopepimut to maximize sales.

Merck needs excitement. Its pipeline is horrible, but it does have one of the new anti-PD 1 drugs in late-stage development, which created quite a bit of buzz at this last year’s ASCO. Yet, aside from this one product, Merck has negative growth and is scheduled to be negatively affected by the patent cliff in 2014. An acquisition of Celldex would be warmly welcomed by shareholders.

Conclusion

I see no way that Celldex does not either A) get acquired or B) trade significantly higher.

Up until this point, most, if not all, of its one-year 280% gains has been related to the survival data from its breast cancer drug. But luckily, the company has another Phase 3 drug that has flown under-the-radar, a product that should be dominating all the headlines within the next few months, rindopepimut. Hence, I say this rally is not even close to being over.


Sherrie Stone owns Celldex Therapeutics. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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