Is It Game Over for Celldex?

Celldex (CLDX -1.99%) has unveiled thoroughly disappointing results for its lead drug, glembatumumab vedotin (glemba), that casts doubt on its future. Can the company bounce back from this failure?

In this clip from The Motley Fool's Industry Focus: Healthcare, Motley Fool contributor Todd Campbell joins host Kristine Harjes to explain what's next for the company following its decision to halt glemba's development.

A full transcript follows the video.

This video was recorded on April 18, 2018.

Kristine Harjes: Todd, we heard all about Alkermes' latest news. What else has been going on?

Todd Campbell: I think the investors that have followed the Fool for years and years might recognize this second company that I thought we should talk about today, Kristine, and that's Celldex Therapeutics.

Harjes: Yeah.

Campbell: Do you remember that, Kristine, Celldex?

Harjes: Yeah, [laughs] I'm still a shareholder, so I know this company quite well.

Campbell: Oh, good, you and I have something in common. Yes. We both own shares, and we're both very, very sad this week. [laughs]

Harjes: Yep. [laughs] Yeah, like I said, I haven't been following healthcare news extremely closely while I was away, but I do get notifications when the stocks that I hold move sizably, which this one did, and not in a good way.

Campbell: Yeah, shares got more than cut in half when their lead drug candidate, Glemba -- I'll call it Glemba for short, right, Kristine, it's crazy long.

Harjes: We're not even going to try with this one. [laughs]

Campbell: Right. [laughs] When Glemba failed to pan out in metastatic triple negative breast cancer, a very tough to treat cancer indication. They had hoped that by targeting a protein that was overexpressed called GPNMB that Glemba would be able to outperform another drug that's used in this indication called Xeloda. And unfortunately for patients and unfortunately for us, shareholders, that didn't happen.

Harjes: This is really disappointing. Xeloda is not a particularly good drug, either. It's just such a tough indication that there was a lot of hope here for patients and investors alike that Glemba would work out. But it didn't meet its primary endpoints. It also didn't even meet many of its secondary endpoints. The only bright spot was that be safety profile was fine, but it doesn't even matter at this point because the drug is now in the dustbin for all indications.

Campbell: Yeah. A lot of times, cancer companies -- because, again, there's a big unmet need for new cancer treatments -- they'll look at and do a post-hoc study and try to figure out if it worked in some subgroups, so maybe they can salvage the drug that way. In this case, they looked at all the data and said, progression-free survival is 2.9 months vs. Xeloda's 2.8 months, no real improvement there. All the secondary endpoints for overall response rate, duration of response, overall survival, no significant advantage there, either. So, they're basically pulling the plug on Glemba's development, all of the different trials that they were conducting and thinking of conducting, and now that's a reset button action. So, investors are stuck looking at it and saying, is it game over for Celldex?

Harjes: And not necessarily. Ever since Rintega, which was their first huge flop, had its failure, the company has really been leaning on two different drugs for its future. One of them was Glemba, so that's no longer an option, but they are still working on a drug that we'll nickname Varli. That's being studied in combination with Opdivo. It's in Phase II. So, that's where all of their efforts will focus right now, and the company will certainly be streamlining all of its expenses toward this one drug. We can expect job cuts coming, expense reductions. The company's cash position is OK, they have about $140 million as of the end of last year, which, now that they're going to be more focused, should last them a little bit longer.

Campbell: If you look at the beginning of the year, Kristine, management was saying that that cash stockpile should get them through 2019. They came out and obviously told everybody about this news on Glemba. One of the things they did say is that because they're not going to have those expenses for theoretically trying to get Glemba commercialized, that they're going to be able to extend out the runway of that money, and now they'll be able to maybe last beyond 2019 with it. We don't know how much further. It's going to depend, again, like you said, on the amount of job cuts they do and what they decide to do with the rest of the drugs that are in their pipeline. It's probably also going to depend a lot on Varli.

Harjes: Absolutely.

Campbell: Varli is being developed in Phase II trials with Bristol-Myers' Opdivo, so, as part of a combination therapy. And we should start to get data reading out on that this year. I think at first, we're going to get ovarian and colorectal and kidney cancer [...] to read out data, and I think that's going to happen probably sometime by the fall. So, if the Varli data is good, maybe, just maybe, that reignites the share price a little bit. I think one of the things investors might be scratching their heads and wondering about, so I think maybe we should talk about it, is that there's $140 million in cash on the books and no debt, but the market cap is only $111 million.

Harjes: Yeah. That's a really good point. Walk me through how that makes any sense.

Campbell: Well, I think people might be looking at it and saying, wait a minute, you're basically not valuing the pipeline at all. You're giving the pipeline a negative valuation because, again, you have more cash on the books than you have as far as market cap. So, I think one of the things investors should remember is that, because there's no commercial revenue coming in, you're going to have to discount that cash. It's really not $140 million, it's probably going to end up continually drip-drip-dripping down to a lower level over the course of the next couple of years until some point in 2019 or whenever they tell us they run out of money. So, you can't really value it that way.

So, there is some value being attached to the pipeline because of the fact that the cash is falling. The real question will be Varli, though, because Varli is now their most advanced drug. They have four or five other programs, but those are all either in Phase I or heading toward Phase I. So, if Varli doesn't pan out, Celldex basically becomes a company with the most earliest of stage drugs, and obviously that's not the position we were hoping to be in when you and I bought this stock a couple of years ago.

Harjes: Yes, but I also want to point out that, I think you and I both recognized how risky this stock was. I know for me personally, I had it in a really tiny portfolio that I keep in Robinhood, which is a zero-commission trading app, and I use that account specifically to build really small positions where I don't want commission taking anything away from it, because it would be too high of a percent for me. So, while I was disappointed to see this, it wasn't a huge loss for me. And hopefully, any of our listeners out there that built a position having heard us talk about this company recognized how risky it was, and you didn't put any money into it that you couldn't afford to lose.

Campbell: Right, I think that's an excellent point. We talk about on this show over and over again, diversify, diversify, diversify, because the fact is that clinical trials fail. It's very common when you're investing in biotech. We've seen it before and we'll see it again. One of the things that David Gardner talks about is not adding to your losers but focusing instead on your winners. I think that, when you go out and buy a company like this -- and it sounds like you did this -- and it's not working, don't chase it lower, don't try to catch that falling knife. Let it play out. Let's see what happens with Varli. And in the meantime, focus on the winners in your portfolio.