Major Near Term Catalysts Could Double Onoconova’s Stock Price

Submitted by Scott Matusow as part of our contributors program.

The biotechnology industry has been one of the best sectors in the market over the past year. The advent of several acts put in place by the government has made it easier for many of these companies to gain approval. Additionally, it used to be extremely difficult for small cap biotech companies to finance running multiple clinical trials. However, cheap debt has given many companies today the luxury of being able to afford running these expensive clinical trials without going out of business. This combination has sparked several private biotech companies to do an Initial Public Offering (IPO).

These biotech IPO’s can be very lucrative if traded correctly. Usually it takes time for the market to find a fair value for these stocks, as investors speculate on how much the company should be worth. This can either leave these stocks severely undervalued or overvalued for a period of time. This week, we believe a new IPO is greatly under speculation valued and could very well be a double by the end of 2013.

Onconova Therapeutics (ONTX) is a biopharmaceutical company that focuses on developing small molecule drug candidates to treat cancer. Onconova recently did an IPO priced at $15 a share on July 25, 2013. Investors were very bullish on the company, as it opened at $25 per share. The IPO raised $79.6M and leaves the company with a strong cash position going forward. Even though the shares rallied after the IPO, we believe the company is still undervalued at today’s current share price. Onconova’s leading drug candidate Rigosertib has been granted orphan status for several indications and also addresses unmet medical needs. The indications that Onconova is pursuing are for 3 markets worth globally over $1B each. With several near term catalysts approaching for these drugs in the company’s pipeline, we believe Onconova is still under-the-radar and tremendously undervalued.

Product Pipeline

Our bodies have two different cellular signaling pathways that are important in determining the growth and proliferation of cancer cells. Whether these pathways are inhibited or activated can determine if and how a cancer cell grows. Several companies have identified two pathways that show promise in diminishing cancer growth when inhibited. These two pathways are termed phosphoionsitide 3-kinase (PI3K) and polo-like kinase (PLK).

The PI3K pathway is involved with cell growth, proliferation and differentiation. Sometimes a mutation in this pathway can cause it to become too active. This excess activity can lead to tumor and cancer growth. The PLK pathway is similar in that it also is directly involved with cell growth. One stage of cell replication is called interphase, where the cell prepares itself for cell division. Scientists have found that inhibiting the PLK pathway can stop certain cancer cells from developing, without affecting normal cell growth.

Onconova is developing Rigosertib, which is an inhibitor for the PI3K and PLK pathways. So far in clinical trials, Rigosertib has shown to be successful for several indications. At the American Society of Clinical Oncology Annual Meeting 2013 (ASCO 2013), Onconova presented a positive poster on the Phase II study of orally administered rigosertib in transfusiondependent lower risk myelodysplastic syndrome patients. Additionally, at the 2013 12th International Symposium on Myelodysplastic Syndromes, Onconova presented a positive poster on rigosertib activity in patients with a myelodysplastic syndrome or acute myeloid leukemia relapsed or refractory to hypomethlating agents.

Rigosertib has been granted orphan drug status for MDS in both the United States and Europe. Rigosertib was also granted orphan drug status for pancreatic cancer in the United States. This gives the company unique leverage as orphan drugs are granted special incentives by the government.

Onconova also has two other drugs in very early stages in the pipeline called ON 013105 and Recillisib. ON 013105 is also a cancer drug that focuses on suppressing the protein cyclin D1. Onconova hopes that this drug can help patients with lymphomas and acute lymphocytic leukemia (ALL). Recilisib, also termed Ex-Rad, is a drug to treat patients with acute radiation syndrome (ARS).

From the chart above we can see that Rigosertib is the most pertinent drug in Onconova’s pipeline because it is the furthest along in clinical trials. Rigosertib is in Phase III clinical trials for both pancreatic cancer and 2nd-line higher risk myelodysplastic syndrome (MDS). Rigosertib is also in Phase II clinical trials for 1st-line lower risk MDS and head and neck cancer. From the company’s July 25 Prospectus, the company states how they have progressed so far for each indication:

“Rigosertib IV in higher risk MDS: We are evaluating rigosertib IV in a multi-center, pivotal Phase 3 trial under an SPA from the FDA in patients with higher risk MDS who failed hypomethylating agent therapy. MDS is a group of blood disorders that affect bone marrow function. We believe that there is a significant medical need for new therapies to treat MDS patients who have failed or cannot tolerate treatment with the hypomethylating drugs azacitidine (Vidaza®) or decitabine (Dacogen®), which represent the current standard of care for higher risk MDS patients.

Rigosertib IV in pancreatic cancer: We are conducting a multi-center Phase 3 trial of rigosertib IV in combination with gemcitabine, a widely used chemotherapy drug, for the first-line treatment of metastatic pancreatic cancer patients.

Rigosertib Oral in lower risk MDS: We are evaluating rigosertib Oral in two Phase 2 trials as a first-line treatment for transfusion-dependent, lower risk MDS patients. The quality of life of these patients could be significantly improved by lowering the number of required blood transfusions or eliminating the need for transfusions altogether.

Rigosertib Oral in head and neck cancers: We are evaluating rigosertib Oral in a Phase 2 trial in patients with head and neck cancers. We expect to complete enrollment of 80 patients in this trial in the second half of 2014. The National Cancer Institute estimated that the 2012 incidence of head and neck cancers was more than 52,000 cases in the United States.”

One important thing to note is that Onconova is targeting those patients who fail to tolerate Dacogen or Vidaza. According to biopharmaceutical industry data, there are about 15,600 cases of MDS diagnosed a year with about 52,000 total estimated cases. It is also estimated that 23% of these patients fall into the higher risk category that Dacgoen and Vidaza fail to treat.

The remaining 77% of these MDS patients are termed lower risk. As stated above, Onconova is also aiming to take a share of that market as well. Its oral formulation of Rigosertib for lower risk MDS also addresses an unmet medical need. The current formulations are given intravenously and Onconova believes their oral formulation provides patients with an easier delivery method. With the additional indications for pancreatic, head, and neck cancers, we believe Rigosertib has some major market potential.

Three Near-Term Catalysts

Identifying companies that are under speculation valued with many upcoming catalysts can be very profitable. Since Onconova is a recent IPO, we feel that investors have yet to realize the potential of the pipeline and the importance of these upcoming data releases. Usually many of the companies we find may have one, or maybe two, catalysts in the near term. Onconova has three catalysts coming up very shortly that we feel have flown under the radar.

1. Onconova expects to present Phase II data for Rigosertib Oral in lower risk MDS in December 2013. The company states:

We reported initial response and safety data from the first Phase 2 trial in June 2013 and expect to complete enrollment and present overall results from this trial in December 2013. Upon completion of the first Phase 2 trial, we will meet with the FDA to discuss an approval pathway for rigosertib Oral as a first-line treatment in lower risk MDS patients. We expect to complete enrollment in the second Phase 2 trial in lower risk, transfusion-dependent MDS patients who have failed erythroid stimulating agents in the second half of 2014.

2. Onconova expects to present Phase III data for Rigosertib IV in higher risk MDS in the fourth quarter of 2013 or the first quarter of 2014. The company states:

“We completed enrollment of 270 patients in this trial in May 2013 and expect to report top-line overall survival results in the fourth quarter of 2013 or the first quarter of 2014. Of the 30 evaluable MDS patients in four early-stage Phase 1/2 trials of rigosertib IV involving 39 refractory MDS patients, we observed objective responses in 12 patients, five of which were complete bone marrow responses. To our knowledge, there are no other current Phase 3 trials in this patient population. If we achieve positive results in this trial, we intend to submit a New Drug Application, or NDA, to the FDA in the second half of 2014, and a Marketing Authorization Application, or MAA, to the European Medicines Agency, or the EMA, by the fourth quarter of 2014 or the first quarter of 2015 for marketing approval of rigosertib IV.”

3. Onconova expects to present Phase III data for Rigosertib IV in pancreatic cancer in the fourth quarter of 2013 or the first quarter of 2014. The company states:

“We are conducting a multi-center Phase 3 trial of rigosertib IV in combination with gemcitabine, a widely used chemotherapy drug, for the first-line treatment of metastatic pancreatic cancer patients. In March 2013, we completed enrollment of 150 patients in this trial and we expect results of the pre-planned interim analysis for overall survival in the fourth quarter of 2013 or the first quarter of 2014. The American Cancer Society estimates that 45,200 new cases of pancreatic cancer will be diagnosed in the United States in 2013.”

With several huge catalysts in the very near term, Onconova is under speculation valued at today’s market cap of about $440M. Investors have yet to investigate the value of these results should they be positive. In our opinion, Onconova could trade near $900M market cap before data is released. This would equate to a stock price of about $45 per share.

Partnerships and Milestone Payments

Onconova has several lucrative partnerships that indicate some large pharmaceuticals are very bullish on the company’s potential. Onconova is partnered with three major entities with well-structured milestone and royalty payments.

Onconova partnered with Baxter International (BAX) in September 2012. This partnership could be worth up to $512.5M in just pre-commercial milestone payments. Onconova already received $50M and an additional $50M equity investment. Additionally, they will receive royalties and sale milestone payments of up to $250M for sales of Rigoseritib in the European Union.

Symbio Pharmaceuticals paid Onconova $7.5M to receive the rights to market Rigoseritib in Japan and Korea. They are also eligible to receive $33M in developmental milestones and $30M in sales milestones.

Onconova received $8M from Leukemia and Lymphoma Society (LLS) to help fund the Phase III ONTIME trial.

Onconova is eligible to receive a total of about $850M in milestone and sales payments. Large cap companies have taken an interest in Onconova and see the pipeline potential going forward. With a current market cap of about $440M, the milestone payment potential alone signifies how undervalued Onconova is currently.

Valuation

Several companies in the oncology field have found success and high valuations as positive results for clinical trials can result in tremendous gains for investors. Although the space is fairly crowded, numerous companies currently have a valuation of $900M or significantly more.

The pancreatic cancer market is projected to reach $1.2B by 2015. Successful results for Rigosertib in pancreatic cancer could be huge for the company. There are big players in this market and could be worth large revenues down the road.

The MDS market is expected to reach $1.5B by 2017. Successful results for Rigosertib for this indication could also be massive. It would compete with Vidaza and Dacogen for lower risk MDS patients, but would have the 23% of the market for higher risk patients secured for itself.

The head and neck cancer market is expected to be worth 1.8B by 2016. Positive data for this indication would spark speculation even further.

Although holding through any data release can be risky, if Rigosertib produces positive data for all of these indications then Onconova could be one of the biggest gainers in the biotechnology sector. With its current valuation, Onconova could see a 400% gain if all data reported is positive. Oncology stocks traditionally are the biggest runners in this sector. With an incredibly small float, we expect Onconova share price to move extremely quickly.

The biotech sector in general has been one of the hottest in the market over the last year, and especially recently. Many companies with new developmental treatments have really taken off during the same time frame.

Ariad Pharmaceuticals Inc. (ARIA) saw its developmental drug, Iclusig approved by the FDA late last year. Ponatinib is a BCR-ABL inhibitor designed to treat adults with chronic myeloid leukemia (CML) and Philadelphia chromosome positive acute lymphoblastic leukemia (Ph+ ALL), two rare blood and bone marrow diseases. As late as 2009, Ariad stock was selling under $0.80 a share. Based on the speculation surrounding ponatinib, the stock traded as high as $25 a share in late 2012. The company currently trades around $19 a share, representing a market cap of over $3.5B dollars.

We feel Onconova has even greater long term potential than Ariad, considering the multiple drugs in its pipeline that address billion dollar markets. Ariad definitely deserves its current market cap, as it’s further along with an FDA approved drug that addresses an unmet need. We feel it will double, if not triple in value in the not too distant future if management executes correctly.

Array BioPharma, Inc. (ARRY) is one such company with developmental treatments that has received a lot of attention lately, resulting in a doubling of the stock price in a short time frame.

Array recently reported its Phase II trial for ARRY-502, meeting its primary endpoint to treat mild to moderate persistent allergic asthma. The drug improved pre-bronchodilator forced expiratory volume in one second. After the news, Piper Jaffray also boosted its price target on Array to $10.

Aegerion Pharmaceuticals, Inc. (AEGR) is another company that has taken off this year, up over 400%. Onconova reminds us of Aegerion in many ways, although both have vastly different drugs. Prior to Aegerion taking off, it had a valuation similar to that of Onconova.

Aegerion started to gain significant notice when the FDA approved its lead drug JUXTAPID™ (lomitapide), in December of last year. Lomitapide is a microsomal triglyceride transfer protein (MTP) inhibitor indicated as an adjunct to a low-fat diet and other lipid-lowering treatments, including LDL apheresis where available, to reduce low-density lipoprotein cholesterol (LDL-C), total cholesterol (TC), apolipoprotein B (apo B) and non-high-density lipoprotein cholesterol (non-HDL-C) in patients with homozygous familial hypercholesterolemia (HoFH).

After Aegerion’s FDA approval, we issued a note to our twitter followers alerting on Aegerion, giving an opinion that the stock would double from $20 to $40 a share. It turns out the stock flew by our ambitious target. We don’t mind this type of missed call, as the stock has more than quadrupled in 8 months. We missed writing on Aegerion, but we have not missed writing on Onconova, which we feel will be trading in the $40 dollar range by the end of the year, and potentially over $75 in one year, provided the company is successful in getting its first drug approved by the FDA — which we believe they will.

When promising companies are brought to the attention of the market, especially promising biotech companies this year, the market has taken notice — with a vengeance. At StockMatusow, we look for well financed companies with a real chance at not only short term stock appreciation potential, but long term success. We strongly feel that Onconova, while still very speculative, has a great chance of seeing 200% gains and more over the next year or so.

Management and Insider Ownership

It is always important in small cap developmental companies to have strong management that can execute on a plan. As seen above, Onconova looks to have proven and experienced management. President and CEO Ramesh Kumar has worked at large pharmaceuticals including Nextran, which is a subsidiary of Baxter. The President of Research and Development Thomas J. McKearn has experience in developing products with unmet medical needs in oncology. Chief Financial Officer Ajay Bansal also has significant financial experience with large pharmaceutical companies.

Insiders are also very bullish on Onconova. According to SEC filings, Baxter owns 2.6M shares of the company. Director Michael Hoffman also owns 4.37M shares. With only about 20M shares total, these represent a large percentage stake in the company.

Cash Position

With so many ongoing Phase II and Phase III trials, investors must consider how much cash the company has on hand. As stated previously, the recent IPO generated about $80M. Combined with the cash already on hand, the company has about $150M. Per the recent prospectus, the company burns about $16M a quarter. This should leave the investors with the peace of mind that the company will not raise in the near term, unless big money institutions want large positions in the company. If this turns out to be the case, we feel a raise of this nature would be extremely bullish for the company, as we feel it would be well supported.

Conclusion

We feel that Onconova could be one of the biggest gainers of the year. Since the company recently did an IPO, investors are not aware of the catalysts and potential of the pipeline. Onconova is addressing markets that generate huge revenues, so the current speculation value is tremendously undervalued. We expect a large run up into the fourth quarter data releases and an even bigger pop if that data proves to be positive. Also, there is a good chance that if the data confirms, Baxter might acquire the company outright in time.