Many biotech stocks posted strong performances in 2017. Celldex Therapeutics (CLDX -1.99%) wasn't one of them. The clinical-stage biotech saw its share price drop 20% last year. And that's on top of losing nearly 80% of its market cap in 2016.
But is Celldex a stock to buy with a new year under way? Here are the arguments for and against the beaten-down biotech stock.
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Reasons to stay away
You won't have to look too hard to find a big reason not to buy Celldex stock: It's risky. Nothing illustrates this risk better than the huge clinical failure for the biotech's once-promising glioblastoma immunotherapy Rintega. And remember: Rintega had already cleared phase 1 and phase 2 hurdles and was in a late-stage study. None of Celldex's other current pipeline candidates are that far along in development.
Another example of the risk associated with investing in Celldex stock is what happened to the company in 2017. Last June, Celldex presented the phase 1 portion of data from a phase 1/2 study evaluating varlilumab in combination with Bristol-Myers Squibb's (BMY -0.27%) Opdivo at a major conference. Investors had anticipated encouraging news, especially considering that the two drugs in theory should have complemented each other. Opdivo inhibits PD-1, a protein that prevents T cells from attacking tumors, while varlilumab stimulates the activation of T cells.
The bad news, though, was that only three out of 36 patients in the study experienced shrinkage of tumors. Celldex stock took a beating from which it still hasn't fully recovered.
There's also the possibility that Celldex could issue more shares in 2018, which would dilute the value of existing shares. The company reported $140.5 million in cash, cash equivalents, and marketable securities as of Sept. 30, 2017. Celldex's management thinks that should be enough to fund operations throughout 2018. However, the biotech could have to make milestone payments in connection with its 2016 acquisition of Kolltan Pharmaceuticals. Celldex intends to use stock to pay these milestones, but if it chose to use cash instead, another stock offering would probably be required.
Reasons to buy
I think the reasons to buy Celldex are easy to spot also. First of all, even after Rintega's collapse, Celldex had six other pipeline candidates, several of which are being evaluated in multiple clinical studies.
The most important of these candidates right now is glembatumumab vedotin, popularly known as glemba. Celldex expects to report top-line primary endpoint data from its phase 2 Metric study of glemba in treating triple-negative breast cancer by the second quarter of this year and perhaps even earlier. This study is enormously important to the biotech. If all goes well, Celldex will file for regulatory approval of glemba based on the Metric results.
Glemba is also being studied in combination with several other drugs. Although data from a phase 2 study of a glemba/varlilumab combo showed only a modest clinical benefit, Celldex is also evaluating glemba in combination with CDX-301 and in combination with either Opdivo or Keytruda in that same clinical study. The National Cancer Institute plans to begin a clinical study evaluating combos of glemba and two Bristol-Myers Squibb drugs, Opdivo and Yervoy, in treating several solid tumors this summer.
Celldex also advanced CDX-3379 to a phase 2 study in combination with Eli Lilly's Erbitux. And the biotech claims several other early stage candidates, including CDX-0158, CDX-014, and CDX-1140.
Final verdict
So is Celldex stock a buy? My view is to look at the probabilities. Some have estimated that glemba could generate peak sales of $500 million or more if approved. Positive results from the Metric study that lead to a regulatory filing could make 2018 the best year yet for Celldex. But what are the chances for a successful study and a subsequent FDA approval?
The likelihood of success for a phase 2 study of a cancer drug is roughly 25%, according to data from the Biotechnology Innovation Organization (BIO). However, BIO doesn't have data for the odds that a drug will win FDA approval based on phase 2 data. But the probability that a cancer drug that completed phase 3 testing will successfully obtain FDA approval is 82.4%. Let's assume the chance is lower for a phase 2 trial and go with 70%. Multiplying 70% times 25% gives glemba a 17.5% probability of winning approval.
What would Celldex's market cap realistically be if glemba did indeed gain FDA approval? If we used a conservative price-to-sales ratio of 5, the biotech should be worth in the neighborhood of $2.5 billion, using a peak sales estimate for glemba of $500 million. Now, let's multiply $2.5 billion times the 17.5% probability glemba will win approval. That gives $437.5 million.
Celldex's market cap right now is less than $390 million, well below the probability-derived valuation. Of course, the assumptions used could be too optimistic. However, we also haven't factored in the potential for Celldex's other pipeline candidates, which would bump the company's valuation higher.
There remains a significant risk that Celldex won't be successful with glemba or its other drugs. I think the risk-reward proposition for the biotech is favorable, though, and view Celldex as a good stock to buy for investors willing to take on a considerable level of risk.
