Investors Overdid the Endocyte Sell-Off

With the stock down 20% in early morning trading on Friday, October 11, PropThink wrote to PropThink Premium subscribers that Endocyte’s (ECYT) weakness offered another buying opportunity given what we considered a strong overreaction to news that vintafolide alone is unlikely to perform better than the chemotherapeutic agent docetaxel in an ongoing lung cancer trial. The stock traded as low as $11.00 in the pre-market. Shares rallied from $12.07 at the open to a high of $13.28 before making a round-trip to close the session at $10.50. While we looked like heroes at mid-day, the close suggested that investors were still uncomfortable with the interim outcome.

TARGET is a Phase IIb trial testing vintafolide, docetaxel, and a combination of the two in 2nd-line non small-cell lung cancer patients with 100% of their lesions expressing the folate receptor (FR). Remember, vintafolide is a FR-targeting small molecule drug conjugate (SMDC), carrying a desacetylvinblastine hydrazide payload. The study’s primary outcome measure is Progression Free Survival (PFS), and Overall Survival serves as one of a few secondary endpoints; the study is powered to show a 50% PFS improvement compared to the control arm. You can read more about Endocyte in PropThink’s previous coverage (1 and 2).

The reaction was, in our view, surprising given the relatively low expectations for vintafolide alone. The TARGET trial is the only late-stage trial sponsored by Endocyte or partner Merck (MRK) that includes a monotherapy arm, and previous results for vintafolide have not been indicative of potential as a monotherapy. The trial sponsors’ decision to pursue vintafolide as an add-on to standard of care in every mid- and late-stage trial but TARGET indicates that the companies simply don’t have high expectations for vintafolide alone; Endocyte and Merck are focused on the combination regimen.

Most importantly, while the data safety monitoring board advised that vintafolide is not likely to be declared superior (on PFS) to docetaxel at the end of the study, the board suggested that patients currently on vintafolide monotherapy may continue treatment based on guidance from their investigator. Had vintafolide as a monotherapy demonstrated worse safety or efficacy than docetaxel, the DSMB would have recommended that patients discontinue treatment with the drug as a monotherapy. Allowing continued treatment at the discretion of investigators suggests that safety and efficacy signals are at least in-line with docetaxel. This supports the thesis that vintafolide is an active cancer therapeutic, and when added to standard of care, may produce a similar PFS benefit to that seen in previous trials, particularly in this targeted population.

On Tuesday, ECYT is getting traction (+13%) with the publication of results from the Phase II PRECEDENT trial (vintafolide+PLD in platinum-resistant ovarian cancer) in The Journal of Clinical Oncology. Results from this proof of concept trial were originally presented in 2011, and we suspect much of today’s price action is investors getting more comfortable with the TARGET interim analysis.

To reiterate, we’re cautiously optimistic about vintafolide’s conditional approval for PROC in Europe (a decision is expected before year-end), although we have capital on the sidelines to increase our position in the scenario that the decision goes against Endocyte. Endocyte’s $370M valuation, $150 million in cash and targeted oncology pipeline create a compelling risk/reward for the long-term investor.

In connection with ECYT, PropThink has taken a long position.