Synta Pharmaceuticals (NASDAQ:SNTA) is a yet-to-succeed firm in the Biotech space with a Phase 3 candidate drug designed to treat cancer. Synta’s lead anti-cancer drug candidate, Ganetespib, has been studied in over 800 patients in more than 25 clinical trials. In preclinical models, Ganetespib inhibits a molecular chaperone called Hsp90, essential to the function of many of the most fundamental drivers of cancer cell growth and proliferation. Ganetespib is currently in Phase IIb/III FDA trials.Ganetespib utilizes a proprietary HDC delivery platform to deliver drugs to cancer cells. The company bills it as “Targeting the molecular chaperon in cancer”.
Synta represents a unique opportunity because of its history. It’s initial HSP90 candidate failed in Phase III trials, burning shareholders and forcing the company to reformulate. Shareholders have seriously discounted the company’s potential in relation to other Biotech firms. The recent departure of a lackluster CEO prompted a recent sell-off as well.
Competing Hsp90 Candidates
|Pharmaceutical Company||Anti-Cancer Therapy||Last Known Therapy Status|
|Astex Pharmaceuticals (ASTX)||AT13387||Phase 2|
|Biogen (BIIB)||BIIB021, BIIB028||Suspended|
|Debiopharm/Curis (CRIS)||Debio 0932||Phase 1/2|
|Infinity Pharmaceuticals (INFI)||Retaspimycin HCI||Terminated after failed trial studying NSCLC|
|Kyowa Hakko Kirin (OTC:KYKOF)||KW2478||Phase 1/2|
|Myrexis (OTCPK:MYRX)||MPC-3100, MPC-0767||Suspended|
|Novartis/Vernalis (NVS)||AUY922||Phase 2|
|Samus Therapeutics||PU-H71||Phase 1|
|Synta Pharmaceuticals||Ganetespib||Phase 2b/3|
Industry professionals are feeling confident about Synta’s drug as well. Multiple health-care organizations are funding their own studies of Ganetespib Most recently the EU, has decided to fund a $100M trial. In total, Ganetespib has the largest clinical study group ever assembled in the space (over 700 patients). Clearly the firm does not want to take chances with another Phase III failure. The amount of partnered organizations signals a clear interest from academia.
Interestingly, the heaps of data being provided are scaring investors away, leading them to the wrong conclusions about the drug and it’s efficacy. Seeking a blockbuster wonder-drug, investors are hesitant to invest in a firm which has accepted the reality that Ganetespib will do best when paired with other drugs. This is only an incrementally better cancer treatment than what is currently on the market, because of this the market is substantially discounting the sales potential. The stock has approximately a 40% short interest, with no clear thesis I have been able to discern other than momentum.
On the flip-side, insiders have been major purchasers, accumulating over $40M worth of shares in the past 6 months.
Here are some conservative sales estimates. We assume that Ganetespib only succeeds with androcarcinoma patients, a tiny subsect of the total addressable cancer market.
|New Cases Cancer per Year||% NSCL||% Androcarcinomas||Market Share||Est Customers||Price Per Customer||Revenue Per Year Est|
|500000||0.85||0.3||0.15||19125||$ 34,000||$ 650|
Now we turn to one of the more interesting sides of Biotech valuation. Because these companies are generally unprofitable, we derive the likely probability of drug approval and multiply that probability by the total potential cash flow to yield what is considered to be a fair value for the company.
Here are the generally prescribed probabilities of FDA drug approval at various phases.
I have assigned much lower probabilities than the generally used examples. I feel Synta merits a more conservative estimate because of its past failures. Additionally, cancer treatments generally have a tougher time getting FDA approved. Even with the lower probabilities, sub-GDP terminal growth rates, and a WACC of 14%, SNTA appears to be significantly undervalued.
|Terminal Growth Rate||15.00%||16.00%||17.00%|
|Approval Probability||Terminal||Enterprise||Fair Value||Per Share||Gain|
|Bear Case||0.25||3,172.21||1,613.75||1,649.28||$ 4||-1%|
|Base Case||0.4||3,301.68||1,749.82||1,785.35||$ 7||71%|
|Bull Case||0.5||3,440.75||1,900.09||1,935.62||$ 10||132%|
Most analyst estimates are around $14/share. The investor willing to take on the substantial risks of this stock could triple their money. The risks are substantial and should not be downplayed.
- Lack of partnerships signal may signal that drug companies are not thrilled by drug prospects
- Previous formulations of HSP90 treatment failed in Phase III trials – Management is mitigating this risk with large-scale randomized trials designed to better target sub-segments of patients which yield greatest efficacy. Previous trials have already provided scads of patient data points.
- Company may need to issue more shares to continue to fund operations, resulting in shareholder dilution (modeled into DCF)
- As a drug class, HSP90 inhibitors have yet to achieve regulatory approval. Furthermore, the development history of competitor HSP90 inhibitors includes the emergence of hepatic, cardiac, and ocular toxicities as a result of formulation issues, but also presumably, in part, as a consequence of the on-target mechanism of action. If Ganetespib is unable to maintain an acceptable safety profile and/or demonstrate meaningful enough efficacy in clinical trials, the drug may not receive the regulatory approval necessary to become marketable.
- Change of focus from mono-therapy to combination treatments are a bad sign for orphan status, but risk is priced in already
- There are several companies with clinical stage Hsp90 inhibitors, many of which have lead development programs in advanced lung cancer. Additionally, multiple companies are developing drugs in NSCLC that may compete with HSP90, or alter the standard of care before Ganetespib reaches the market. Some of the companies competing with Synta have substantially greater resources and development capabilities.
The best way to hedge this risk is to diversify it away. I remain long in SNTA, PETX, EPZM, and BIND. At least one of these companies will likely fail. One or two others will probably do OK. One of them may go to the moon. I feel that SNTA may in fact be one of the safer plays, because the market has severely discounted past failures. I regard the CEO leaving as a potentially good thing. He displayed a tendency to zealously exaggerate drug potentials, and Glassdoor.com reviews were largely negative towards him in particular. Positive clinical results by the end of 2014 could propel this stock upwards over the next couple years.