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$CLSN Run-Up Valuation

publication date: Jul 7, 2011
author/source: Jeff Dos Santos

CLSN Run-Up Valuation by Jeff Dos Santos

"The U.S. Food and Drug Administration (the “FDA”) recently has designated our pivotal Phase III HEAT Study for ThermoDox®, in combination with radiofrequency ablation, as a Fast Track Development Program. We have received written guidance from the FDA stating that, assuming the results of our ongoing studies are adequate, we may submit our New Drug Application (“NDA”) for ThermoDox® pursuant to Section 505(b)(2) of the Federal Food, Drug and Cosmetic Act. A 505(b)(2) NDA provides that some of the information from the reports required for marketing approval may come from studies that the applicant does not own or for which the applicant does not have a legal right of reference and permits a manufacturer to obtain marketing approval for a drug without needing to conduct or obtain a right of reference for all of the required studies. The availability of Section 505(b)(2) and the designation of ThermoDox® as a Fast Track Development Program may provide us with an expedited pathway to approval. There can be no assurance, however, that the results of our ongoing studies will be adequate to obtain approval of ThermoDox® under Section 505(b)(2)."

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Celsion Corporation (CLSN) is an innovative oncology drug development company primarily focusing on improving treatment for the target population affected with different forms of cancer. CLSN’s lead product candidate is ThermoDox (Doxorubicin dramatically enhanced with lysolipid thermally-sensitive liposomes (LTSL)). ThermoDox is currently being tested to potentially treat patients suffering from hepatocellular carcinoma (also known as HCC or primary liver cancer).

(Note: How it works:
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(Note: ThermoDox is also currently being tested to potentially treat RCW (recurrent chest wall) breast cancer, under the DIGNITY trial, but this valuation will primarily focus on only the HCC market (the HEAT study)).

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ThermoDox is currently being evaluated under a Special Protocol Assessment (SPA) agreement with the FDA in a 600 patient global Phase III trial. CLSN’s phase III HEAT trial has over 95% enrolment, and is expected to provide an interim analysis and complete enrolment sometime expected in September 2011. The study is designed to evaluate the efficacy of ThermoDox with radiofrequency ablation (RFA) when compared to patients who receive RFA alone as the control. The primary endpoint to look out for is the PFS (progression free survival). The secondary endpoint is overall survival. A pre-planned, unblended interim efficacy analysis will be performed by the Independent Data Monitoring Committee when enrolment in the HEAT study is complete and 190 PFS events are realized in the study population.

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(Note: A SPA is a declaration from the FDA that an uncompleted Phase III trial’s design, endpoints, and analyses are acceptable for FDA approval.
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(Note: PFS is a metric frequently used to evaluate the effectiveness of a cancer treatment. PFS improvements however do not always correspond to improvements in overall survival, which is why both endpoints are to be independent from each other. More about PFS:
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(Note: " A rolling NDA submission allows a company to file the completed portions of an NDA for an ongoing review by the FDA. A rolling NDA submission can be done only for drugs that have received Fast Track designation from the FDA. A Fast Track designation allows an expedited review of pipeline drugs that treat serious life-threatening diseases with significant unmet clinical need."

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While ThermoDox alone exhibits a promising future, CLSN’s main constraint has been their financials. More specifically, the one obvious constraint being dilution in many forms:

Monday, 28 Sep 2009 08:30am EDT Celsion Corporation Announces $7.1 Million Registered Direct Offering “
“Thursday, 17 Jun 2010 09:26am EDT Celsion Corporation Secures $15 Million Committed Equity Financing Facility “
“Thursday, 13 Jan 2011 07:00am EST Celsion Corporation Announces Convertible Preferred Stock Financing And Amended License Agreement For Aggregate Gross Proceeds Of Up To $9 Million”
“Friday, 21 Jan 2011 03:36pm EST Celsion Corporation Announces Completion Of $5.1 Million Registered Direct Offering “
“Friday, 27 May 2011 08:00am EST Celsion Corporation Announces $8.6 Million Equity Offering of Common Stock and Warrants”
“Friday, 1 Jul 2011 08:00am EDT Celsion Corporation Announces $6.6 Million Registered Direct Offering “
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CLSN (for the three months ended March 31st, 2011) received $2M in licensing revenue from Yakult Honsha Co. under their development, product supply, and commercialization agreement for ThermoDox. R&D costs were $4.349M, and G&A costs were $1.215M, leaving total operating expenses to be $5.564M. Accounting for other net expenses, the net loss for the quarter is $3.764M.

Cash and cash equivalents (before collecting their net payment of $6M from operating a registered direct offering on July 1st, 2011) is valued at $1.965M, short term investments currently valued at $131,000, and prepaid expenses and other current assets are valued at $1.651M, leaving total current assets to be $3.747M. Given all other assets such as property and equipment and financing fees, this sets total assets to be $4.808M. Accounts payable and accrued liabilities are set at $6.74M, combined with a noncurrent portion from January’s 2011 preferred stock offering of $2.878M and all other liabilities leaves total liabilities to be $9.848M. This sets total equity to be -$5.04M.

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(Note: Before the interim analysis (which is to be expected on September 2011) comes CLSN’s Q2 2011 earnings release scheduled on August 4th, 2011. Therefore we shall conduct an EPS estimate to account for this event in the valuation:

- We do not expect the other $2M licensing revenue payment to be received next quarter (primarily based on the unfortunate events that occurred in Japan on March and April 2011).
- We believe R&D costs will be valued at $4M
- We believe G&A costs will be valued at $1.5M

Therefore, we have a net income loss estimate of $5.5M (or an EPS estimate of -$0.35) for Q2, 2011.)

Run-Up Valuation

(Note: The length of this valuation is intended to be longer than usual valuations given that we are discounting time from the event of a possible PDUFA date. We therefore broke it down into steps to avoid any possible confusion.)

(1) Primary Liver Cancer Market:

"Nexavar (Sorafenib) is a multikinase inhibitor drug developed by Bayer HealthCare and Onyx Pharmaceuticals and is the only approved targeted therapy for liver cancer, as stated by the new market research report on Liver Cancer Drugs. However, only a few drugs, including one or more of ThermoDox, Sutent, Avastin, Tarceva are expected to enter the market in the foreseeable future, while the long-term potential market growth appears robust with the entry of additional drugs "

Global Liver Cancer Drugs Market to Exceed $2B by 2015, according to New Report by Global Industry Analysts, Inc.”

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GlobalData valued the liver cancer market in 2009 at $382.2m… GlobalData estimates that the liver cancer market in 2017 will be $1.2bn, indicating a compound annual growth rate (CAGR) of 15.5% between 2009 and 2017.”

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(Note: Doxil is primarily for Ovarian cancer. One thing to note is that Ovarian cancer can spread through the bloodstream, causing cancer cells to spread to organs such as the liver and lungs. "When cancer spreads from its original place to another part of the body, the new tumor has the same kind of abnormal cells and the same name as the original tumor. For example, if ovarian cancer spreads to the liver, the cancer cells in the liver are actually ovarian cancer cells. The disease is metastatic ovarian cancer, not liver cancer. For that reason, it is treated as ovarian cancer, not liver cancer".)

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As always, the drug market for CLSN is equal to the market share CLSN faces times the market drug value (the primary liver cancer market value).

Let’s assume, if ThermoDox is included, that half of the market (50%) can be captured by ThermoDox leaving Nexavar with the other half. We believe the rolling NDA date is to be set (with FDA action) in 2012.

These two liver cancer market values were the most reliable figures from our set of liver cancer market values. Let’s take the lower of the two values. In 2009, the liver cancer market was $382.2M. In 2012, given a CAGR of 15.5% between 2009 and 2017 sets the liver cancer market to be $588.89M.

Therefore, the liver cancer market ($588.89M) times the market share (50%) equals $294.45M, CLSN’s potential drug market.

(2) Sum of Shares

Up to 2012, we believe dilution is inevitable. Usually, the standard rate is 25% of the current total shares outstanding. Let’s assume CLSN dilutes 100% of the total current sum of shares. The total sum of shares CLSN is expected to have outstanding in 2012 is therefore the current sum of shares (16.67M) times the assumed dilution rate (100%) which equals 31.34M.

(3) Gross Revenue Margin

Let’s assume a gross margin of 40%. The gross revenue margin is the gross margin (40%) times the drug market ($294.45M) which therefore equals $117.78M

(4) Profit Attainable

The annual profit CLSN can receive if ThermoDox is approved is equal to the gross revenue margin ($117.78M) minus total operating expenses.

Let’s assume that total operating expenses will be a function of either the standard normal sum of operating expenses for a company currently pursuing phase III designation ($50M) or an estimated aggregate of what CLSN is expected to pay (approximately $27.5M in R&D and G&A, plus $1.84M for NDA submission), whichever is higher. Therefore, let’s assuming CLSN’s total operating expenses leading up to the NDA is $50M.

Therefore, CLSN’s profit attainable is $67.78M.

(5) Potential Value of CLSN

Let’s assume that the price-over-earnings (P/E) ratio is 20.

The potential value of CLSN if ThermoDox is approved is equal to the annual profit attainable ($67.78M) times the P/E ratio (20) which is equal to $1.356B.

(6) Price Per Share

The price per share of CLSN if ThermoDox is approved is equal to the potential value of CLSN ($1.356B) divided by the projected sum of shares (31.34M) which equals $43.27

(7) Probability of Approval

Let’s assume the standard independent probability of approval to be 50%. CLSN is in a burn situation
(-5%), has no financial safety net (-10%), contains the standard PDUFA risk (-3.58%), and must be adjusted for seasonality (+7.15%). Therefore the scale at which investors face is 38.57%.

(Note: We did not add bonuses for fast track designation nor a possible priority review status in order to counter the strict conditions CLSN must face from their SPA.)

(8) Run-up price to the PDUFA

The run-up price to the PDUFA is equal to the price per share if ThermoDox is approved ($43.27) times the scale at which investors face (38.57%) which equals $16.69

(Note: We are not done calculating the run-up price to the interim analysis)

(9) Adjusted Discounted Run-Up Price to the interim analysis

The adjusted discounted run-up price is equal to the run-up price to the PDUFA discounted in terms of time and uncertainty, times the probability of trial success, minus the calculated EPS estimate.

(a) The actual discount rate is equal to the standard discount rate per year (25%), plus the chance of a trial delay (10%), plus the chance for even heavier dilution than accounted for (5%), all multiplied by a duration factor in years up to the PDUFA (let’s assume a max of 1.25 years, therefore the factor is 5/4). Therefore the discount rate we shall apply is 50%.

The calculated run-up price to the PDUFA ($16.69) minus the discount in time and uncertainty investors face (50% of $16.69, which is $8.35) is equal to $8.34

(b) We believe there is a 90% chance of trial success. Therefore the discounted run-up price ($8.34) times the probability of trial success (90%) is equal to $7.51

(c) We calculated an EPS estimate of -$0.35, which will occur before the interim analysis. The adjusted discounted run-up price is equal to the discounted run-up price ($7.51) minus our EPS estimate (-$0.35) which gives us an adjusted discounted run up price of $7.16

(Note: If one is holding through the results, according to our model if ThermoDox is able to produce positive results, the price would be $8.34 as this price resembles trial success at this stage. If results are negative, such that the endpoints are not met, the price may fall to the $1-2 level.)

Given that we are comfortable with the above calculations, we have decided to attach an alternative yet even more conservative approach since this situation CLSN is in can be quite debatable. This alternative approach is more for those who are risk averse, as we view this alternative calculation as a checkpoint.

The idea behind this alternative approach is to lower CLSN’s market share to include Doxil (even though that its primary function is intended for patients with ovarian cancer) since Doxil has the ability to kill as many cancer cells as possible, and to provide a relief on the scale at which investors face since fast track designation and priority review status counts as a benefit to investors (that is, while we believe the FDA will view the SPA in a stricter manner, trial design failure by using a SPA is reduced significantly.)

-Lower the market share to 33.33% (it will include DOXIL, but not include the ovarian cancer market). This will set the drug market to $196.28M

-Keep the sum of shares as is (31.34M)

-Given the same gross margin of 40%, the Gross Revenue Margin will then be $78.51M

-Profit will then be $28.51M

-Keep the P/E as is (20)

-Value/Market Cap if approved would then be $570.16M

-Price per share if approved would then be $18.19

-Given a scale at which investors face of 38.57%, add 25% for fast track designation and 10% for priority review status to the scale at which investors face (73.57%)

-Run up price before PDUFA would then be $13.38

-Keep all trial success rates/discount rates the same, with the same EPS measure (90%, 50%, and
-$0.35 respectively)

-The discounted price would then be $6.69

-The discounted price after considering the probability of trial success would then be $6.02

-The final adjusted discounted run-up price to the interim analysis (our checkpoint) would then be $5.67