I initiated coverage on Senesco (OTCQB:SNTI) four months ago when it was trading at $3. Shares rose above $7, but have since retreated. This provides an ideal opportunity for investors because since my last article, 2 positive events have occurred:
Number 1: Senesco just reported excellent data for cohort 3 of the current clinical trial. This milestone event takes Senesco one step closer to addressing the $75 billion cancer drug market.
Number 2: Opko's (OPK), Dr. Phillip Frost just initiated a 9.99% position in Senesco. As some of my readers know, all my Dr. Frost investments have provided returns above 100%. For example, soon after Dr. Frost initiated a position in MusclePharm (OTCQB:MSLP), the stock went from $4 to $13.
Dr. Frost and his team are capable of conducting a very high level of due diligence, and his investment in Senesco is a strong validation of the company's management and technology. It's probably not coincidental that Dr. Frost initiated his Senesco position immediately after the positive cohort 3 data was announced. One also has to wonder if Opko could be interested in acquiring Senesco.
Near-term catalyst could more than double shareprice
In my opinion, another reason for Dr. Frost's new position in Senesco, is because in about 3 months, Senesco will be releasing the results for cohort 4 of its current clinical trial. Positive results could have a significant effect on the share price because this would be the point at which Big Pharma could begin making serious buyout or partnership offers.
This trial revolves around Senesco's next-generation oncology drug that has already outperformed the best oncology drug on the market. Thus far, all clinical trial results have been good which gives us an indication that the upcoming data could be positive as well. Here are the three most likely outcomes of the current part of the clinical trial:
Number 1: Given the high quality of past clinical data, the most probable outcome is that good safety and efficacy are reported. This would be considered a home run and would dramatically increase Senesco's valuation.
Number 2: Another possible outcome would be good safety data but no demonstration of efficacy. But since efficacy has been demonstrated in previous cohorts, as well as in all animal trials, there is a reasonable likelihood that some level of efficacy will be demonstrated in this cohort as well.
Number 3: The worst case would be for poor safety and efficacy data. While this definitely remains a possibility, it is unlikely given the clinical data we have seen thus far.
One factor that will amplify the importance of any positive data is the fact that the patients in these trials are extremely ill, so safety and efficacy are being challenged by unusually difficult conditions. In other words, an otherwise healthy patient could take a given drug and not suffer any adverse effects, but an unhealthy patient that is given the same drug is more vulnerable in terms of safety. Efficacy is also challenged for the same reason. What this means is that if Senesco can demonstrate safety and efficacy within these challenging parameters, the drug should be even more effective and safer with patients whose diseases are less advanced.
Two trading opportunities
Often with biotech stocks, the share price often runs up in anticipation of positive clinical data, and we could see that happen with Senesco. That provides the first trading opportunity. The second opportunity will be when Senesco reports clinical data. If the data is positive, we should see an additional increase in the share price.
What is Senesco worth today?
Senesco is currently valued at about $20 million. In my last article, I stated that Senesco should be valued between $30 and $40 million, and that was before the positive cohort 3 clinical trial results. After speaking with Chairman Dr. Harlan Waksal (see below), I realized my estimates may have been too low. Dr. Waksal believes that Senesco is worth more than $100 million today.
He brought up a good point; if Senesco is successful with phase 2 trials, the company will be worth more than $1 billion instantly. With that in mind, Senesco's value today could be over $100 million.
Just to put things in perspective, Bristol Myers (BMY) bought the rights to Elotuzumab, a multiple myeloma drug, in a deal that was valued at $710 million. At the time, this drug had only reached phase 1 clinical trials. (Senesco's current drug trials are also focused on multiple myeloma.)
If Bristol Meyer was willing to pay $710 million for Elotuzumab, a phase 1 drug, I would think that Senesco's drug, which has performed well in phase 1b/2a clinical trials, should be valued at considerably more than $20 million. Even if we were to give Senesco a valuation of only $50 million, that would still be more than a 2X return on today's share price.
Senesco's lead drug kills cancer cells without affecting normal cells
The drug in the current trial is SNS01-T, which has outperformed the best cancer drug on the market. I recommend all investors study the presentation that was given at the American Society of Hematology late last year. The results are stunning.
Senesco's methodology revolves around a gene therapy and small inhibitory RNA approach. The gene is delivered with a specific set of instructions that allow it to only kill cancer cells without affecting normal cells. More details are provided in this recent news release.
This is a significant breakthrough; Senesco has found a way to kill cancer cells without creating collateral damage. In other words, healing without side effects. Given the horrendous side effects of most oncology drugs, Senesco's stellar safety profile could help the company capture a large share of the oncology market.
Senesco's gene technology could treat most types of cancer
If Senesco's first drug continues to achieve clinical success in treating multiple myeloma, the company will be able to program its gene for different types of cancer treatment simply by changing the promoter. For example, if the company wanted to target liver cancer, it would use a liver cancer specific promoter. For lung cancer, Senesco would use a lung cancer promoter.
With this approach, Senesco should be able to treat most types of cancer, thus creating a practically endless pipeline. Each new cancer drug that is added to the pipeline could add at least $500 million to Senesco's top line.
How big is the cancer drug market?
Worldwide cancer drug sales were estimated to be $75 billion for 2012. Here is a breakdown of the top cancer drugs in the United States:
With numbers like this, it becomes clear why many oncology companies are given such high valuations, and why Senesco should be given a higher valuation.
Any new cancer drug that can demonstrate efficacy while limiting side effects should be able to capture a large market share. Senesco could become a major force in the cancer drug market because of Senesco's potential to address all types of cancer.
My interview with Senesco Chairman Dr. Waksal
I wanted to understand more about Senesco's technology, valuation, and market potential, so I initiated a conference call with Chairman Dr. Harlan Waksal. Dr. Waksal co-founded the biotech company, ImClone Systems which sold for $6.8 billion to Eli Lilly (LLY) after a bidding war with Bristol-Myers Squibb (BMY). He is considered a pioneer in the cancer drug space and is currently focusing his attention on Senesco.
After several conversations with Dr. Waksal, I was impressed with his knowledge of the science, as well as the business. In my opinion, he is more than capable of helping to develop Senesco into a multibillion dollar company. Following are excerpts from my interview:
Q: In layman's terms, could you explain how your drug works, and why it could potentially be effective against all types of cancer?
Dr. Waksal: By turning on a natural process Senesco's drug candidate reprograms cancer cells to die. Because this process is a natural part of the body's defenses against any cancer, it is potentially effective against any type of cancer.
Q: For the scientists out there, could you give a brief technical explanation?
Dr. Waksal: Briefly, the Senesco drug turns up the expression of a protein that induces cell death while turning down expression of a related protein that promotes cell survival.
Q: Am I correct in understanding that this drug could be used for all types of cancer?
Dr. Waksal: In my opinion, it can be used for all cancers, but each time you target a cancer, it would be a different drug. It would be a modification specific for each new type of cancer. That's what's so exciting because it gives the company such potential.
Q: Does this mean that you could have a pipeline with literally dozens of different billion dollar drugs?
Dr. Waksal: Yes. Each drug candidate designed to target a particular cancer, like liver, lung, and skin, could be a separate product with great revenue potential.
Q: The results of your animal studies were extraordinary. Large tumors were completely eradicated. Can we expect the same level of success in the human studies?
Dr. Waksal: You do the animal studies in order to get a prediction of whether or not this will be effective in humans. When you see the kind of robust animal data that we saw, it gives you a tremendous amount of hope and expectation. It doesn't always translate, but when you see such a robust impact and such a broad impact on a number of different tumor types, the level of optimism is high. In the animal studies we have never seen a failure with any tumor type.
Q: Were there any side effects in the animal trials when you were giving the same dose level as the 3rd cohort in the current human studies?
Dr. Waksal: There were no limiting side effects.
Q: Why are you focusing on multiple myeloma?
Dr. Waksal: This is a big market. Celgene's (CELG) $68 billion market capitalization is largely a result of its multiple myeloma drugs. Multiple myeloma is a liquid cancer. That means that you can get to it easily without having to go through the layers of solid tumors, and because it is biologically active it's relatively easy to drive the cells to a death pathway. Multiple myeloma is a cancer with reliable markers of disease progression that be can be measured by simply taking patient blood samples. This is important because it allows us to easily see if the drug is having an effect on the disease.
Q: What is the purpose of the 4th cohort?
Dr. Waksal: What we really want to get out of this study is that we want to show at what dose level we can optimize biologic activity and demonstrate safety and signs of efficacy. I say signs of efficacy, and that's important because these patients are extremely sick. On average these patients have had 4 or 5 different courses of various treatments, and when they're coming to us they are pretty much at end-stage. So it is providing us with information primarily on safety, but we are also looking for any signs of stabilization. In animal trials, we showed that we were able to stop the disease progression. When we used our drug in combination with other drugs for multiple myeloma, the tumors disappeared completely. Since this is one of the first gene therapy drugs ever used in cancer, we first need to convince the regulatory authorities that we can deliver this drug in a safe way. And we also want to show signs of efficacy so we can treat patients that are less far along in the disease progression where we have a greater potential for really helping the patients.
Q: So you would consider the 4th cohort a big success if you demonstrated safety, and any sign of efficacy. Is that correct?
Dr. Waksal: Yes.
Q: When will you be publicly announcing cohort number 4 data?
Dr. Waksal: Around the end of Q1 in 2014.
Q: When you increase the dose level again for the 4th cohort, do you expect to see problems with safety?
Dr. Waksal: As the dose is increased, we expect to see a bigger effect, and there could be a higher incidence of safety issues. However, based on what we have seen so far, even in the 4th cohort, we believe that our drug will be well tolerated.
Q: How is your drug any better or different than what's on the market now?
Dr. Waksal: The gene therapy approach we are taking is entirely new. It's a radically new approach. Furthermore our target, which is patent protected, is a new approach which is not addressed by any marketed products. On the other hand, our drug works similarly to a combination of existing products because it hits their targets.
Q: With your experience in the biotech field, you must have an idea of fair valuation for Senesco. The best comparisons I have come up with are Geron (GERN), a company that has generated mixed clinical results and has a valuation of $650 million. Genmab (OTC:GNMSF), which has provided good clinical results, is valued at $1.9 billion. And then there's Pharmacyclics (PCYC), which is in phase 3 clinical studies, further along than you, and the company is valued at $7.9 billion. When I look at these 3 companies and compare stages of development, safety and efficacy data, and valuations, your current $20 million valuation seems ridiculously low. What's your thought on this?
Dr. Waksal: We are tremendously undervalued. It's almost silly how low the valuation is. We are given practically no enterprise value. And we have a potential drug that has utility across all cancer types.
Q: With that in mind, what do you think Senesco is actually worth today?
Dr. Waksal: If we are successful in our phase 2 clinical work, Senesco will be worth at least $1 billion. If we show potential in one cancer type, that will indicate potential in most types of cancer. That will be recognized right away. That's where the valuation of the company is going to take off. Even if Senesco were valued at $100 million today, I would consider that low because when we are able to demonstrate the potency of this drug, the valuation will be in the billions, immediately.
Q: And that doesn't include the value of the agricultural division. In my last article I valued that division at $20 million. Is that accurate?
Dr. Waksal: I think that's a very fair valuation.
Q: With positive data from the field trials, what will the agricultural division be worth?
Dr. Waksal: Our licensees are pursuing the major food crops as well as cotton, alfalfa and renewable fuel sources. The value attributable to the agricultural application depends on how many and which products emerge. It might be reasonable to assign about $20 million in value to each product that comes to the market.
Q: Do you anticipate success in the agricultural division, or is that a long shot?
Dr. Waksal: No, I don't think that's a long shot at all. Between us and our partners, we have consistently shown the ability of this gene to increase yields and to be protective against various types of plant infections.
Q: What would Senesco be worth with positive data from the 4th cohort?
Dr. Waksal: Positive data from cohort 4 could jump Senesco into the hundreds of millions of dollars range.
Q: Since you went through the whole development process at ImClone up to the point of selling the company, what's your big picture outlook on Senesco?
Dr. Waksal: With clinical success in Phase 2, Senesco will follow the Pharmacyclics path. First will come strategic investments from large pharma companies, followed by acquisition in a similar way ImClone was bought by Eli Lilly (LLY), and recently Onyx was acquired by Amgen (AMGN).
(At this point the interview was concluded.)
Dr. Waksal's Valuation summary
Senesco is currently valued at $20 million, which in my opinion is way too low. Here is a summary of Dr. Waksal's estimations of Senesco's valuation:
- Fair valuation today: above $100 million.
- Valuation following positive cohort 4 results: above $200 million.
- Valuation following positive phase 2 trial results: $1 billion.
I also spoke with analysts, and key opinion leaders to get their opinions about Senesco's valuation, and most were in agreement with Dr. Waksal's valuation estimates. But even if we were to cut all those numbers in half, investors would still realize substantial returns.
Dose escalation could produce superior results
Dr. Waksal stated that cohort 4 data will be reported around the end of Q1. With the positive data from cohort 3 that was just reported, in my opinion there is a reasonable likelihood that cohort 4 data will be positive as well.
This is a dose escalation study, and in animal trials, the higher doses produced greater efficacy. It would not be surprising to see greater efficacy in the higher dose human trials as well. The cohort 4 dose level is the dose that had the best effect in animal models of cancer.
Institutional investors are beginning to take notice
Not only has Dr. Frost initiated a position, but Michael Brauser, founder and president of Marlin Capital Partners, recently initiated a 9.99% position in Senesco. Michael Brauser's investment in Senesco further reinforces validation for the company's management and technology. Here is a short list of some of his accomplishments:
- 1995: Sold Kertz Security Systems to Wayne Huizenga for $28 million.
- 1998: After a series of rollups in the security business, sold company to Ameritech for $660 million (now known as ADT).
- 2001: Sold Naviant, an internet company he built, to Equifax for $135 million.
- 2004: Sold Seisint, a data fusion company that he co-founded in 1999, to Reed Elsiver (Lexis/Nexis) for $780 million.
- 2009: Sold 5to1 (an internet company) to Yahoo for $28 million.
- 2010: Sold Interclick (an internet ad network) that he founded in 2007, to Yahoo for $280 million.
You will notice that Michael Brauser is well-versed in developing and selling early-stage companies. In my opinion, as Senesco continues to demonstrate good clinical results, more institutional investors will come on board. With only 5 million shares outstanding, any institutional buying on the open market will have a huge impact on the share price.
Competition
Senesco is not alone in the multiple myeloma space. Onyx Pharmaceutical's drug, Carfilzomib, is being studied in several clinical trials either as a single-agent or in combination with other therapies. Onyx was just bought out by Amgen for $9.7 billion.
Celgene's Pomalidomide is now conducting phase 3 clinical trials for multiple myeloma. Celgene is valued at $68 billion.
And then there is one of my biotech favorites, Pharmacyclics, a company that has never sold any products but has a shareprice that has risen from $5 to $144 in the last two years. The company is currently valued at $7.9 billion, and Goldman Sachs recently gave the company a price target of $170 while estimating that its lead drug, Ibrutnib has a $7.5 billion market potential.
My point is this; when you start comparing Senesco to other oncology companies, a $20 million valuation seems ridiculously low.
Insider buying at $26 per share
Late last year, there was noteworthy insider buying. Harlan Waksal purchased shares at $26, split-adjusted, and Christopher Forbes purchased shares, also at $26.
We are now presented with a rare opportunity because we can buy shares substantially below where the insiders increased their positions. More importantly, a significant amount of positive clinical data has been reported since the insider purchases, which amplifies the value proposition for today's investors. Also, insiders generally do not buy unless they have substantial reasons to believe that the company will succeed.
NASDAQ relisting will also be a positive catalyst
Another positive catalyst could be a NASDAQ relisting. This event would bring in a whole new wave of buyers, institutions in particular, who will only come in after the relisting. For example, Organovo (ONVO),went from $3.90 to $8.50 following the company's recent relisting.
Senesco's balance sheet
As of last quarter, Senesco had $790,000 in cash, and they have since raised $6.75 million, putting the total at about $7.54 million, minus any burn that has occurred. The company could also receive up to $12.6 million in the next 6 months, from the exercise of warrants. Harlan Waksal has extended a line of credit for a couple of million dollars, but it's unclear as to how that enters into the equation.
The agricultural division de-risks this trade
Investors are so focused on the oncology division that they often forget about the value of the agricultural division. Thus far, in the greenhouse, Senesco's gene technology has performed well. Currently, Senesco's agricultural partners, which include Monsanto (MON), Bayer (OTCPK:BAYRY), and Scotts (SMG), are conducting field studies. I expect field data to be reported within 12 months, and if any of the partners report positive data, this could be worth over $20 million to the company's valuation.
What I like about this trade is that the agricultural division alone is equal to Senesco's market capitalization. This de-risks the situation considerably because even if the current drug trials were to fail completely (unlikely), investors would be protected by the value of the agricultural division.
The risk
The risk parameter is easy to understand because within 3 months, we should have data that will either propel Senesco towards success, or leave the company with the valuation of the agricultural division. The entire risk right now is based on what the company reports for the cohort 4 trials. Negative efficacy and safety data would immediately hurt the share price, but the share price the could rebound as a result of the agricultural division's valuation. Do I expect negative data to be reported? No. Could it happen? Yes, that's always a risk.
Given the healthy balance sheet, I don't see any near-term dilution risk.
Conclusion:
Senesco presents my ideal type of trade: an extremely undervalued company with an important near-term catalyst and a reasonable probability of a positive clinical outcome. With positive data we could see dramatic share price appreciation. When you include the insider buying and Dr. Frost's and Michael Brauser's large positions, the upside potential is amplified. Given the value of the agricultural division, the downside is limited, making this a compelling asymmetrical trade.
After speaking with Dr. Waksal, I am confident in his ability to manage Senesco through this pioneering phase of opportunity. He was successful with ImClone, and in my opinion, he has the experience and ability to develop Senesco into a multibillion dollar company. I have also had many conference calls with CEO, Les Browne, and was equally impressed with his knowledge of both the science and the business. Senesco has already proven to be a profitable trade, and the upcoming catalyst could provide investors with substantial returns.
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Disclosure: I am long OTCQB:SNTI, OPK. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. (More...)
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