Endocyte Hit Hard After Merck Drops Partnership Print E-mail
By Brian Wilson - Lead Contributor   
Wednesday, 18 June 2014 07:56

Endocyte (ECYT) is a cancer drug developer that was largely known for the non-small cell lung, breast, and late-stage cancer therapy Vynfinit (vintafolide, or EC145) that was being developed in partnership with Merck. The partnership was started in April 2012, and it included an upfront payment of $120 M plus milestone payments worth $880 M, and percentage-based royalties on all future sales of Vynfinit.

This partnership triggered a prolonged rally in shares of ECYT, sending the stock from its April 2012 lows of $3.80 per share to $33.70 per share in March of this year. Citing the potential application of Vynfinit in multiple cancer indications, with multiple drug combination possibilities, analysts and commentators were quick to point out that the drug could eventually generate hundreds of millions in royalties for Endocyte with the help of Merck. Merck would also gain a new patented product to combine with generic chemotherapy regimens.

So why did Merck dump its investment in Vynfinit?

There are probably multiple factors that contributed to the decision, but this appears to be a direct reaction to the recent failure of the Phase 3 PROCEED trial. This trial was designed to combine Vynfinit with a chemotherapeutic agent called Doxil (doxorubicin delivered with liposomes) in patients with platinum-resistant ovarian cancer.

The primary endpoint of this large Phase III was based on progression-free survival (PFS) – a measurement of a drug’s ability to slow the growth of tumors. One arm, which was treated with both Vynfinit and Doxil, was compared to another arm which was treated with just Doxil.

After an interim analysis was performed by an independent Data Safety Monitoring Board (DSMB) earlier this year, it was discovered that there was virtually no chance that the Vynfinit and Doxil arm could show a statistically significant improvement over the Doxil arm in PFS. In other words, this clinical trial was a dud.

This was a huge blow to Endocyte, and investors panicked. The stock plunged from $17.38 per share on May 1st to $6.62 per share on May 2nd.

It’s not surprising to see Merck pulling out of the partnership now that the dust has settled, but what does this mean for Endocyte?

Although the Endocyte is quite cash-rich at this point (~$52.9 M as of December 31, 2013), large Phase 3 trials in oncology are incredibly taxing on smaller companies. If Endocyte does decide to try a Phase 3 for Vynfinit without a new partner, expect the company’s quarterly operating losses to jump dramatically after patient enrollment starts.

Because of its situation, we do believe that the company is looking around for a new partner for the Vynfinit program.

Until a deal materializes (if this happens at all), we expect that the stock’s performance should be more closely correlated with early and mid-stage data readouts from other products in the pipeline (like EC1169, which recently initiated Phase 1 testing) that will support Endocyte’s ~$166 M enterprise valuation. Unless the company decides to pursue a new Phase 3, short-term declines in the stock would be unwarranted.

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