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CytRx Corporation: A Unique Pharmaceutical Small Cap

Cyrtx drug companyCytrx Corporation

Investment Overview

Cytrx, a micro, undervalued biopharmaceutical company, currently has three main high potential drugs in its pipeline. Recently, Bloomberg BusinessWeek highlighted the effectiveness of one of their drugs; Tamibarotene, which is positive for the Phase II drug undergoing clinical trial. Ray Johnson, a Dallas basketball player turned musician had 30 cancerous tumors prior to participating in a four month clinical trial of the drug. The successful, complete removal of these tumors indicates high potential for the drug and the company.

Very few small bio pharmaceutical companies have as many drugs in the pipeline at the same time as Cytrx(85m market cap, EV $55m). Out of the three, Baftinib and Tamibarotene are in Phase II, while INO-206 is in Phase I. The company has very low risk of failure owing to this broad pipeline. In addition to the high potential of these drugs, if there are failures or the FDA does not approve, there are other drug options to rely on and pursue.

Furthermore, the FDA given designation of “Orphan Status” to the potential drug candidates in Cytori’s pipeline is a big positive for the company.  Cytrx is also backed by a great management team, which has demonstrated their expertise by recently turning the company profitable.

As far as the financial stability, the company has $30 million as cash in its balance sheet (as of first quarter 2011) which is enough for the company to cover its expenses for a year and a half. The financial capital is further strengthened by the scheduled royalty payments which ensure consistent cash flow. Furthermore, the company has no long-term debt to weigh them down.

If things go as planned and all the milestones are met along with favorable drug trial results, the company should be worth more than $120 million, which would be a 40% gain.

About the Company

A biopharmaceutical research and development company, CytRx Corporation, founded in 1985, specializes in oncology and development of human therapeutics. The headquarters is located at Los Angeles, California.

Currently the drug development pipeline of Cytrx consists of clinical development of three products for cancer indications. Along with this, there are two planned Phase II INNO-206 clinical trials for the treatment of soft tissue sarcomas, pancreatic cancer and gastric cancer, one Phase I pharmacokinetic clinical trial of Bafetinib for patients with brain cancer, and two Phase II clinical trials of Bafetinib to measure its effectiveness in patients with high-risk B-cell chronic lymphocytic leukemia and advanced prostate cancer. Additionally, the pipeline of CytRx also includes Phase II clinical trial of Tamibarotene in combination with chemotherapeutical agents in patients with non-small-cell lung cancer; Tamibarotene is also in a registration clinical trial for treatment for acute promyelocytic leukemia (APL).

CytRx has a molecular chaperone technology regulation program, which includes a planned Phase II clinical study of Arimoclomol in patients with amyotrophic lateral sclerosis and another Phase I stage development of Iroxanadine, which the company recently sold off to a Denmark-based Orphazyme.

CytRx competes with major biopharmaceutical companies such as Johnson and Johnson, GlaxoSmithKline, GenVec, Mitsubishi Tanabe Pharma Corporation, Aventis Pharma AG, Biogen Idec, and Ono Pharmaceuticals to name a few. However, one unique characteristic in the pharmaceutical industry is that even while competing against giants like JNJ, Cytrx can maintain its moat by having a patent on a specific drug.

 

Key Statistics

TICKERCYTR
Market capitalization85 million
Shares Outstanding109.22 million
Float102.87 million
% held by insiders4.15%
% held by institutions12.10%

 

Drug Portfolio:

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brain cancer drugs
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INNO-206

CytRx has the exclusive global rights to INNO-206 which aims at reducing side effects by controlling drug release and enhancing tumor targeting efficacy. It is a prodrug of the commonly prescribed chemotherapeutic drug doxorubicin, which is an FDA approved agent effective for treatment of lymphomas, sarcomas, and various cancerous tumors.

Dr. Kratz, the inventor of INNO-206, conducted an animal study and successfully demonstrated significant results in breast, pancreatic, ovarian, and small-cell-lung cancers.

INNO-206 passed the Phase 1 clinical trial in which the drug was administered at six times the standard dosing of doxorubicin without observing any increase in the side effects which usually accompanied the treatment agent doxorubicin. Out of the 35 patients, 3 showed partial tumor reduction and 20 patients witnessed stability in growth of disease during the trial period.

CytRx has revealed the plans of initiation of Phase 2 clinical trial of INNO-206 for the treatment of patients with soft-tissue sarcomas. The company will start with the trial in the second half of 2011 right after the completion of the dose escalation safety study of INNO-206.

 

BAFETINIB

Bafetinib is a drug originally developed by the Japanese company called Nippon Shinkyaku and CytRx owns the worldwide patent ex-Japan. It is the improved and upgraded version of the drug called Greevec and second-line tyrosine kinase, which aimed at the treatment of chronic myelogenous leukemia (CML). Bafetinib has FDA approval and has been granted the Orphan Drug Status for the treatment of Philadelphia chromosome-positive CML.

The company currently has two Phase II proof-of-concept clinical trial of Bafetinib; one to analyze the effectiveness and safety of the drug in patients with high-risk B-cell chronic lymphocytic leukemia or B-CLL, and another for treatment of patients with advanced prostate cancer. A Phase I pharmacokinetic clinical trial of Bafetinib in patients with brain cancer is also among the CytRx pipeline.

 

TAMIBAROTENE

Tamibarotene is a synthetic retinoid compound which aims at reducing the toxic side effects of the differentiation therapy with all-trans retinoic acid (ATRA) during the first stage of leukemia treatment. Both tamibarotene for Non-Small-Cell Lung Cancer and Acute Promyelocytic Leukemia (APL) are in Phase 2 of clinical trial. Tamibarotene has been granted the Orphan Drug Designation for APL and Fast Track Designation for the use of the drug after the treatment with ATRA and arsenic trioxide by FDA. Furthermore, tamibratene has also been granted the Orphan Medicinal Product Status for the treatment of Acute Promyelocytic Leukemia by the European Medicines Agency.

 

Drug Portfolio Potential

According to Steven A. Kriegsman, CEO and President of CytRx Corporation, tamibarotene would prove to be an opportunity for the company to establish a multi-billion dollar business if or when the drug shows considerable improvement and extension for patients suffering from NSCL cancer and prove to be an effective treatment for multiple forms cancers. Currently Tamibarotene has shown significantly positive results in case of patients with advanced APL; some reports indicate total elimination of the disease among patients who had previously not seen any progress with any other treatment.

Bloomberg BusinessWeek elucidated the case of Ray Johnson, a Dallas basketball player/musician who suffered from terminal blood cancer. Initially, Johnson had 30 cancerous tumors, which were completely eliminated after 4 months of taking Tamibarotene during the Phase II proof-of-concept clinical trial conducted by CytRx.

By studying multiple drugs at the same time, the risk of failure decreases as unfavorable results of one of the compounds in trial would not necessarily lead to the failure of the company as research or trial focus can be shifted from non-effective to effective drugs. Moreover, the compound Tamibarotene currently in the pivotal phase of trial has high success potential and would generate $150 million annually once it hits the market, which is enough for CytRx to smoothly continue operations.

The FDA given designation of Orphan Status, the drug can enjoy market exclusivity for 7 years with the realization of tax credit on clinical trials along with FDA user fee exemption in some cases.

The study of late-stage diseases saves time and expenditure as information regarding the disease is gathered more easily and quickly, speeding up the trial process of CytRx.

Cash Holding

CytRx has approximately $30 million in cash which depicts high liquidity and sound financial position keeping in mind the fact that the company expends $15 million every year on operating activities for clinical trial and development. Regardless of the fact that CytRx plans on spending $20 million in 2011 and 2012, the cash currently in hand is enough to cover the expense for almost two years.

 

Non-Dilutive Monetization Strategy for Non-Core Assets

CytRx sold off its molecular chaperone assets to Orphaztme ApS which could generate up to $120 million (more than double the company’s current EV). In addition to an up-front payment and added royalty payments, if all development and commercialization milestones are realized.

The sale of RXi Pharmaceuticals’ common stocks has further added $17 million in non-dilutive financing.

CytRx gained ownership of 163,000 ADVENTRX Pharmaceuticals common stock in exchange for the 19.1% stake in SynthRx before its acquisition by ANX Pharmaceuticals. CytRx is entitled to $2.9 million shares of ANX stock after the commercialization of ANX-188 which would resultantly increase the financial asset of CytRx by an additional $7.7 million along with scheduled royalty payments.

cyrtx balance sheet
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cyrtx current assets
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current assets cytrx 2011

Balance Sheet Analysis

Over the period of past three years there has been substantial increase in assets. As evident from the asset decomposition graph, in 2008 major portion of the asset was made up of cash and cash equivalents which drastically decreased in 2009 and 2010. This is not an unusual trend in the biopharmaceutical industry where cash has to be utilized to fund the investment of drug development and clinical trials. In the first quarter of 2011, there has been increase in cash and cash equivalents owing to the non-dilutive monetizing strategy of non-core assets. The consistent growth of assets and low asset burn-out rate is representative of the expertise of the management.

liabilites cyrtx decrease in debt
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total Liabilites cyrtx 2008-2009

The liabilities side of the balance sheet illustrates an impressive reduction in overall liabilities since 2008. Another favorable aspect highlighted by the liabilities decomposition is the fact that CytRx has no long-term debt, which gives it more ability to deploy capital, without restrictions or pressure from debt holders.

 

Management Analysis

CytRx Corporation has an impressive team of management and board of directors who have substantial expertise in the field of pharmaceuticals and healthcare. The chairman of the board Dr. Max Link, Ph.D, was CEO at Centerpluse Ltd. a Swiss pharmaceutical company, Corange Ltd., and Sandoz Pharma, which is the second largest manufacturer of generics in the world. Another eminent member of the board is Dr. Louis Ignarro, who in 1998 won the Nobel Prize for Medicine.

Among the notable members of the management team, Daniel Levitt has had quarter of a century worth of experience as a senior manager and has competently driven various biotechnology and pharmaceutical companies to success. Dr. Levitt has led the Research and Development of large pharmaceutical firms such as PDL BioPharma, a multi-billion dollar business at his time, Affymetrix and Geron to mention a few. Furthermore, Scott Geyer, the Senior Vice President of manufacturing at CytRx Corporation has experience working at the same position in two large biotechnology firms, namely, Biomarin and Onyx Pharmaceuticals.

 

Positive Outlook Highlights

  • Capable management team with focus on non-dilutive monetizing strategy.
  • Sufficient cash holding of $30 million with planned expenditure of $20 million.
  • Scheduled royalty payments which guarantee consistent addition in capital.
  • Strong balance sheet.
  • No long-term debt.
  • High drug portfolio potential with broad pipeline of drugs currently under trials.
  • FDA given designation of Orphan Status ensures 7 years of market capitalization.

 

Risks

  • High regulatory risk due to dependence on FDA for approval of the compounds in CytRx’s pipeline.
  • High volatility associated with small cap stocks.
  • Comparative illiquidity due to low market capitalization and resultant transaction volume.
  • The inability to achieve planned development and commercialization goals by Orphaztme ApS could lead to reduced expected payments.

 

 

 

This is part of a paid, but independent Research Series on CYRTX. The views and opinions expressed in this Series are purely my own. I have no positions in CYRTX, and no plans to initiate any positions within the next 72 hours. Rule 17B requires disclosure of payment for investor relations services. Value Walk has been compensated $750 by a third party  on 06/16/2011 for one sponsored post/ advertisement for CYRTX. For complete disclosure/disclaimer statement, please review the Disclosure Statement relevant to this Series.