Markets & Finance

GTx: A Compelling Biotech


S&P says the company's lead drug candidate, Acapodene, represents a "significant opportunity" in the treatment of prostate cancer

From Standard & Poor's Equity ResearchGTx (GTXI; recent price, $12) is an emerging biotech with potentially significant near-term catalysts for its stock price, in Standard & Poor's view. The company expects data from two phase III studies for its lead drug candidate, Acapodene, during the first quarter of 2008. The first study, for the treatment of side effects in prostate cancer patients undergoing androgen-deprivation therapy (ADT), has produced positive interim data in secondary endpoints of improved bone mineral density and lipid control, lowering serum low-density lipoproteins, or LDLs, ("bad" cholesterol) and triglycerides. The second study, expecting interim data, is exploring Acapodene's ability to prevent prostate cancer in patients with precancerous lesions called high-grade PIN (prostatic intraepithelial neoplasia). We believe both target markets represent population opportunities of more than 1 million patients.

The company also has emerged as the leader in a new class of drugs called SARMs (selective androgen-receptor modulators). Compelling phase II data for lead candidate Ostarine in treating cancer cachexia (muscle wasting) led to a November, 2007, partnership with Merck (MRK), under which the companies will pool drug candidates and scientific expertise to pursue broad indications such as sarcopenia, or frailty in the elderly, which GTx estimates afflicts 13 million people in the U.S., 25% of the population over 60. We believe the collaboration provides significant milestone and royalty potential for GTx while Merck covers all development expenses.

Acapodene represents a significant opportunity in the treatment and prevention of prostate cancer, and we believe GTx's shares have been too heavily discounted during the recent downturn in the global equity markets. (The stock is trading well below its 52-week high of 23.64 in April, 2007, and the 23.34 at which Merck purchased $30 million of GTx stock in the 2007 collaboration.) We see Acapodene's two lead indications each having greater than $500 million in annual revenue opportunities.

Further, we hold a positive view of GTx's collaboration with Merck, as it should provide significant potential for milestone and royalty payments, and afford the company the opportunity to pursue lucrative indications for its SARM candidates, which we think the company wouldn't have the resources to pursue alone. At recent prices, the stock offers substantial upside to our 12-month target price of $27, and we have placed a 5 STARS (strong buy) recommendation on the shares.

Company Profile

GTx is developing treatments for men's health conditions, focusing on small-molecule biopharmaceuticals that selectively modulate the effects of estrogens and androgens, two important classes of hormones that regulate the reproductive system, but have important effects on the muscular, skeletal, cardiovascular, and central nervous systems.

Estrogen levels gradually rise, leading to unwanted clinical effects in aging men, including enlargement of the prostate, gynecomastia (male breast enlargement), or promoting prostate cancer. Testosterone levels decrease in aging men. Testosterone is the predominant androgen in men, important for mental well-being and such masculine characteristics as muscle size and strength, bone strength, sexual interest, potency, fertility, and hair loss.

Selective estrogen-receptor modulators (SERMs) and SARMs differ from synthetic hormones, or steroids, which are typically used to stimulate hormone receptors, but are active in all tissue types in a nonselective manner. SERMs and SARMs bind to and selectively stimulate or block receptors, depending on the type of tissue in which the receptor is found. As a result, GTx believes its drugs can maximize wanted clinical effects of a steroidal hormone, while minimizing unwanted clinical side effects.

Company Outlook

According to the Prostate Cancer Foundation, prostate cancer is the most common nonskin cancer in America, affecting 1 in 6 men, and an estimated more than 2 million American men are currently living with prostate cancer. However, when detected early, treatment success rates are high.

GTx's lead product candidate, Acapodene, is a SERM taken orally once daily. Its initial indication, in phase III study (dosed at 80 mg), is for the treatment of the adverse side effects of ADT in men with prostate cancer.

ADT is the standard treatment for advanced prostate cancer. It reduces blood levels of testosterone either surgically by removing the testes or chemically. Notable side effects include osteoporosis, muscle weakness, hot flashes, gynecomastia, depression, loss of libido, and erectile dysfunction. GTx estimates that there will be 1 million U.S. prostate cancer patients receiving ADT in 2008. Final patient treatment of GTx's phase III study was completed in late 2007, and data are expected in the first quarter of 2008. If successful for reducing bone fracture risk, we see GTx filing a new drug application (NDA) for FDA approval during 2008. GTx also plans to conduct label-expansion-enabling studies for additional therapy side effects.

We are encouraged about the phase III results, given previous interim analyses that showed Acapodene significantly improved bone mineral density and reduced total cholesterol, LDLs, and triglycerides.

The second Acapodene study in phase III testing (dosed at 20 mg) is for the prevention of prostate cancer in men with high-grade precancerous prostate lesions, known as high-grade PIN. Research has shown patients with high-grade PIN are at high risk of developing prostate cancer. GTx has estimated that more than 1.1 million patients have biopsy-confirmed HG PIN, but believes that figure understates the condition, given physician diagnosis difficulties. To that end, GTx is working with several companies to develop noninvasive diagnostic tests to better identify patients with HG PIN.

Enrollment in the 1,590 male patient trial was reached in May, 2006. Given the three-year follow-up duration, GTx intends to file an NDA for this indication on completion in 2009. However, if the forthcoming interim analysis reaches statistical significance, it is possible that GTx could file for FDA approval in 2008 as well, while completing the study.

In 2006, GTx licensed European marketing rights for Acapodene to the Ipsen Group, for €23 million ($30 million). The company is also entitled to milestone payments of up to €39 million (currently $57 million) based on approvals, reimbursement of certain expenses, and tiered royalties as a graduating percentage of aggregate European net sales.

We are encouraged by the prospects for Acapodene's regulatory approval, as both studies are being conducted under an FDA Special Protocol Assessment, which is an official evaluation and guidance on the design of pivotal trial protocols. We believe this designation should limit agency scrutiny in the event of positive outcomes. Further, we do not believe drug safety poses approval risk, as Acapodene's active ingredient, toremifene citrate, has been on the market for many years for treating breast cancer, with no reported safety issues.

The company's second product candidate is Ostarine, a SARM under development to treat symptoms of aging that involve loss of muscle mass and bone. Ostarine's initial indication is for treatment of cancer cachexia, or muscle wasting that occurs when cancer causes the body to go into a starvation-like state, reducing lean body weight, which can cause weakness, fatigue, immobility, and even death. The prevalence of cachexia increases from 50% to more than 80% before death and is cited as the main cause of death in more than 20% of patients, according to the American Cancer Society.

GTx initiated a phase II-b trial in July, 2007, studying non-small-cell lung cancer with a 16-week primary endpoint of lean muscle mass. The company expects to commence a phase III cancer cachexia trial in 2008 and has projected an initial 2010 FDA filing for Ostarine. GTx had planned an Ostarine study for chronic kidney disease and end-stage renal disease, however, this trial will be determined as part of the Merck collaboration.

In November, 2007, GTx announced a collaboration pact with Merck over the SARM class of drugs, including Ostarine, under which GTx received $70 million up front, $40 million in cash and $30 million in equity investments, with additional research reimbursement. Further, GTx will be entitled to royalties and milestones up to $422 million on any compound, regardless of which company discovers the compound, while Merck covers all development expenses. We have a positive view of the partnership for its research-and-development savings to GTx, as the company had planned four phase III studies for Ostarine across several indications, and we believe the SARM program would have grown considerably as a percentage of GTx's expenses in the coming years.

In July, 2007, management announced plans to enter two new compounds into clinical development in 2008. The first of these, GTX-838, is a SARM (now included in the Merck partnership) for the treatment of sarcopenia, which we believe represents a multibillion-dollar opportunity, one that GTx could not have pursued alone. Sarcopenia is aging-related muscle wasting, which tends to be exacerbated by physical inactivity, hospitalization, and chronic kidney disease. Sarcopenic patients also carry a higher risk for type II diabetes. The second program, GTX-878, is unpartnered and focuses on estrogen receptor beta to potentially treat benign prostatic hyperplasia and prostatitis (enlarged and inflamed prostate, respectively).

Valuation

Our 12-month target price of $27 reflects a forward price-to-sales multiple of 6 times (at the low end of range of 6 to 8 times for biotech drugs with a similar growth profile) applied to our 2011 revenue estimate of $400 million, discounted back three years at 30% per year to account for inherent development risk in the shares. We see the potential approval of Acapodene leading to profitability for the company in 2010.

We assume an Acapodene launch in its ADT and HG PIN indications in early 2009 and 2010, respectively. Further, we estimate Acapodene will garner 8% and 6% market shares in these respective markets by 2011, and see potential for these market shares to increase given, in our view, the lack of viable treatment options in these areas. Also, we have excluded from our analysis any Acapodene royalties from ex-U.S. sales by partner Ipsen, which we estimate will carry a double-digit royalty rate, reflecting our view of a less-certain regulatory filing time line.

We estimate GTx ended 2007 with approximately $150 million in cash, after receiving $70 million as part of the Merck collaboration, in which Merck bought $30 million of stock for $23.34 per share, a 40% premium to GTx's 30-day share price average at the time of the transaction. In addition, the company has no debt or stock purchase warrants outstanding.

Corporate Governance

We have a mostly favorable view of GTx's corporate governance practices. We are encouraged that the company's board is controlled by a majority of independent outsiders and that all directors with more than one year of service own stock. In fact, company insiders owned roughly 50% of the shares, as of 2007's proxy statement. In addition, we note that GTx has posted governance guidelines on the company's Web site.

On the negative side, despite the separation of the roles of chairman and CEO, we see potential for conflicts of interest, as Chairman J.R. Hyde III is considered an affiliated outsider. Mr. Hyde, who also chairs GTx's compensation committee, is a longtime financial contributor to the research of GTx's CEO Mitchell Steiner and is the company's largest shareholder.

Investment Risks

Risks to our recommendation and target price include negative phase III clinical trial outcomes for Acapodene or GTx/Merck's SARM program candidates. We see potential for negative investor sentiment should the Acapodene PIN trial interim analysis not show statistical significance, despite the trial continuing under more lenient criteria in the final year of study follow-up.

GTx expects to generate marginal revenue until an Acapodene launch. The company has not actively promoted its in-licensed Fareston (another formulation of toremifene citrate) for metastatic breast cancer, and certain patents on toremifene citrate may expire in 2009, after which competitors could market generic versions for off-label indications not covered under GTx's method of use patents, which run until 2019-23.

Lastly, GTx's shares are thinly traded, with a recent 90-day average trading volume of 174,000 shares. Insiders currently hold just less than 50% of the shares outstanding, while institutional shareholders hold about 35%, and Merck roughly 3% after its recent equity investment. As a result, we believe that GTx shares will likely remain highly volatile.


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