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$ANX Run-Up Valuation

publication date: Mar 17, 2011
author/source: Jeff Dos Santos

See the bottom of this valuation for an update from 7/8/11

ADVENTRX Pharmaceuticals (ANX) is a specialty pharmaceutical company focused on acquiring, developing and commercializing proprietary product candidates.  In this article, we shall be focusing on their primary product candidate:  ANX-530 (also known as Exelbine effective March 12th, 2010).

“ADVENTRX Pharmaceuticals, Inc. Receives Refuse To File Letter From FDA On ANX-530 New Drug Application Monday, 1 Mar 2010 01:00am EST 

ADVENTRX Pharmaceuticals, Inc. announced that it has received a refuse to file letter from the U.S. Food and Drug Administration (FDA) regarding its New Drug Application (NDA) for ANX-530 (vinorelbine injectable emulsion). In the letter, the FDA indicated that the data included in the initial submission from the intended commercial manufacturing site was insufficient to support a commercially-viable expiration dating period. FDA identified only the one chemistry, manufacturing and controls (CMC) reason for the refusal to file. ADVENTRX plans to meet with the FDA as soon as possible to discuss its response. To support a commercially-viable expiration dating period, the stability data provided in the ANX-530 NDA met ICH filing requirements for a new drug. Site-specific stability data from lots manufactured at the intended commercial manufacturing site also were submitted in the NDA.”

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(Note: A “Refusal to File” is the FDA’s response when it does not contain information required under section 505(b) (in which for ANX, it was their CMC reason). Refusal to file NDAs is efficient in the FDA’s perspective since it is a waste of agency resources and/or limited industry resources as well, and that it is not fair to other sponsors who meet the underlined obligations of section 505(b).

On Wednesday, 3 Nov 2010 , ANX “announced that it has submitted a New Drug Application (NDA) to the U.S. Food and Drug Administration (FDA) for its product candidate ANX-530 (vinorelbine injectable emulsion), or Exelbine. ADVENTRX is seeking approval of Exelbine for the same indications as Navelbine, a branded formulation of vinorelbine, including non-small cell lung cancer. ADVENTRX submitted the NDA as a 505(b)(2) application that relies in part on the FDA's findings of safety and effectiveness of a reference drug. The Company's 505(b)(2) NDA submission includes data from one clinical bioequivalence study designed to assess the pharmacokinetic equivalence of Exelbine and Navelbine, the reference drug. In this clinical bioequivalence study, Exelbine and the reference drug were determined by ADVENTRX to be bioequivalent.”

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They recently announced their PDUFA date, “Near-term, we continue to prepare for the commercial launch of Exelbine and our September 1 PDUFA  date”.

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ANX’s main source of financing is diluting shares. Over the past 2 years they have generated $54.8M (from one year ago, they have diluted 7.269M shares when their share count in December 31st 2010 was 15.48M) from diluting shares. Their most recent financing closed $22.5M from selling 8,184,556 units at $2.75.

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We believe that the main reason ANX did this was to boost institutional interest. Institutional holdings are set at 1.8% which is quite low.  Accounting the total number of shares owned by institutions (So that’s 1.8% of 15.48M shares = 278,640), plus the “direct offering to RA Capital Management, certain healthcare-focused investors, and other institutional investors” (See link above) (So adding 278,640 and 8,184,556 is 8,463,196) divided by the new total number of shares outstanding (which is 8,463,196 divided by (15,480,000 + 8,463,196 = 23.94M )  is 0.3535) returns the new institutional holding ownership which is 35.35%.

(Note: We will note this link near the end of the article to discuss a very important aspect).
As of December 31st, 2010, cash was $27.979M, and all in all total assets equalled $28.487M. Total liabilities included accounts payable ($480,000), accrued salary ($457,000), and accrued liabilities ($865,000), therefore total liabilities equalled $1.801M which leaves total equity to be $26.685M.
ANX received their first grant of $489,000, but apart from that they face a burn situation. Their main costs are selling G&A ($1.897M) and research and development ($898,000). All in all, the net income attributable to ANX is -$2.285M (or an EPS of -$0.15)

(Note:  Page F-4 is annual data, therefore you must subtract the difference from the sum of all previous quarters for 2010 to obtain Q4 data)

ANX’s ANX-530 (Exelbine) is a product candidate for the treatment for non-small cell lung cancer (also known as NSCLC). “GlobalData estimates the global NSCLC disease market to be $2.8 billion in 2008. It is forecast to grow at a compound annual growth rate (CAGR) of 13.5% for the next seven years to reach $6.8 billion by 2015”

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The 6 major products marketed are Avastin (bevacizumab), Taxotere (docetaxel), Gemzar (gemcitabine), Alimta (pemetrexed), Tarceva (erlotinib), and Iressa (gefitinib). There is also mention of 10 other promising drugs under clinical development, but let us break down their current status:

(1) Nexavar (sorafenib) - Will not tap into the markets so soon:

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(2) Stimuvax - Will not tap into the markets so soon (Phase III)

"START (Stimulating Targeted Antigenic Responses To NSCLC), is a multi-center, randomized, double-blind, placebo-controlled Phase 3 study that will evaluate patients with documented unresectable stage IIIA or IIIB NSCLC who have had a response or stable disease after at least two cycles of platinum-based chemo-radiotherapy. The study is expected to involve more than 1,300 patients in approximately 30 countries. "

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(3) Sutent (sunitinib malate) - Failed Phase III trial (due to overall survival)

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(4) AMG 706 (motesanib) - Study will only be completed at or around July 2013

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(5) Vargatef (BIBF 1120) - Will not tap into the markets so soon (Phase III)

(6) BIBW 2992 (Tovok) - Will not tap into the markets so soon (Phase IIB/III)

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(7) Aflibercept (VEGF Trap) - Results were released a few days ago (March 11th, 2011). The data that they announced (adding afibercept to the chemotherapy drug docetaxel) did not meet the required overall survival improvement. 

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(8) ASA404 - Was flopped (during the Phase III trial) on March 29th, 2010, and on November 11th, 2011, they discontinuted the NSCLC clinical trial since they failed to meet extending the overall survival rate.

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(9) Erbitux (cetuximab) - Will not tap into the markets so soon (Phase III/IV)

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(10) Figitumumab - First, this trial was suspended for unknown reasons. Then, Results were not likely to improve overall survival, therefore has been withdrawn from the race.

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The drug market that ANX can grasp is the market drug ($2.8B times 1.135 (this is the CAGR rate + 1) to the power of 3 (since 2011-2008 = 3) divided by 7 (since there was no country share distribution of the 7 researched globally, let’s assume they are all equally weighted) which is $584.86M) times the market share (assuming Exelbine can squeeze in with the others, ANX can grab a 1/7 market share) equals $83.551M.
ANX has diluted a lot over the years, so we shall assume that ANX will dilute 100% of their shares in one year. That is, the total sum of shares in one year’s time is equal to the current some of shares (15.48M) times 2 (or 1 + 100% instead of the standard 25%) which equals 30.96M.

Let’s assume that the gross margin is 40% and the Price over earnings is 20 since there is no revenue being generate to calculate these values.

The gross revenue margin is equal to the drug market ($83.551M) times the gross margin (40%) which is therefore equal to $33.42M.

The annual profit to be made is equal to the gross revenue margin ($33.42M) minus the aggregate amount of operating expenses ($6M in G&A, $4M in R&D for ANX-514, $1.8M for ANX-530 prep) minus the cost of goods sold (40% of $33.42M) which therefore equals $8.252M.

The value of the company in one year’s time assuming approval is equal to the price over earnings (20) times the annual profit ($8.252M) which is $165.04M

The price per share in one year’s time assuming approval is equal to the value of the company ($165.04M) divided by the sum of shares (30.96M) which is equal to $5.33

The probability of approval (50% assuming independence) minus the PDUFA risk (-3.58%) plus the seasonality adjustment (+6.78%) gives us 53.2%.

(Note: Think of this percentage, the 53.2%, as a scale from 0 to 1. 0 being that there is absolutely no chance this potential can hit the price per share, and 1 being that it is guaranteed that this potential can hit the price per share)

The calculated run up price is therefore the price per share ($5.33) times the adjusted probability (53.2%) which is therefore equal to $2.84.

Note: Off-Topic, but worth mentioning:
We found out that as of right now (March 14th, 2011), ANX has a book value equal to the market value.

The current market value is $2.08 (as of March 11, 2011).

They released 8,184,556 shares. This means as of right now, there are 23,664,556 diluted sum of shares.

From that release, they gained $22.5M, which would set their cash levels at $50.479M 

That means their new total equity is $22.5M + $26.685M = $49.185M

Divide this by the new diluted sum of shares ($49.185M / 23,664,556) and that gives you $2.08 which is the book value.

The price to book ratio (which is the market stock price divided by total assets minus total liabilities) is equal to 1. This ratio is incredibly low (in fact the lowest we’ve seen so far), which can mean (for the biotech sector) that the potential has either not been calculated into the stock price, or that investors believe that they demand more data from their leading product candidates before there exists a run up.)

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Update from Author 7/8/11

Actually, I personally think ANX right now is currently overvalued. The only reason why the price has blown my target away was from the 2 targets released from Rodman & Renshaw (Target of $16 from $4.50) and from Vista Partners (Target of $7.50) in the span of 3 days.

Now, going through this, Vista Partners stated on June 22nd, 2011 that "Vista Partners announced today that it has initiated  coverage on ADVENTRX Pharmaceuticals, Inc. (AMEX: ANX) ("The Company" or "ANX"); with a twelve month target price of $7.50."

That's fine, I mentioned a conservative 1 year price of $5.33, so i think that target Vista Partners presented was fair. >

As for Rodman & Renshaw's target, they announced the upgrade, but didn't provide reason why they upgraded it. In fact, that goes for any stock they've upgraded. >

What i did then was go through my data, search for new significant effects ANX has endured up to the point of when that target was released, and try to figure out why the upgrade was made. I couldn't find anything significant. My best guess is that this too is possibly a 1 year target price, but  even that would be quite large. 

Say Exelbine (ANX-530) gets FDA approval, that leaves ANX with 2 more product candidates: ANX-514 and ANX-188. ANX-514 will need some more time as "The Company currently is developing a study protocol for submission to the FDA and intends to continue discussions with the FDA regarding 
the phase 3 study and other requirements for approval of ANX-514.
. Same goes with ANX-188, as "ADVENTRX currently is planning to meet with the FDA to reach agreement on a phase 3 clinical trial protocol for ANX-188 for the treatment of pediatric patients with sickle cell disease in acute crisis." > >

So all in all, i think the ANX valuation is fine as is.