CEPH Cephalon (MM)

We are maintaining a Neutral recommendation on Cell Therapeutics Inc. (CTIC) with a target price of $1.25 following appraisal of the second quarter results.

Cell Therapeutics suffered a net loss of 14 cents per share in the second quarter of 2011, compared with a net loss of 46 cents (excluding special items) in the year-ago quarter. The narrower loss in the reported quarter was due to lower operating expenses and lower deemed dividend paid to preferred shareholders. The Zacks Consensus Estimate for the reported quarter was a loss of 12 cents per share. Cell Therapeutics did not generate any revenue during the reported quarter versus $0.029 million in the second quarter of 2010. Total operating expense in the quarter declined 15% to $16.9 million.

However, we believe investor focus is more on the future of Cell Therapeutics’ lead candidate pixantrone which is being developed for the treatment of hematologic malignancies and solid tumors than the earnings results.

In December 2010, Cell Therapeutics filed an appeal against the decision of the FDA in April 2010 to deny approval to pixantrone for the treatment of relapsed, aggressive non-Hodgkin's lymphoma (NHL) in patients who have not responded to other treatment options. The approval was denied due to concerns that the late stage trial PIX301 (which formed the basis of the NDA filing) had not sufficiently proved the effectiveness of the drug. The FDA asked Cell Therapeutics to conduct an additional trial to determine the safety and efficacy of pixantrone. Cell Therapeutics met with the FDA Office of New Drugs (OND) in May 2011 which allowed it to re-submit the NDA for pixantrone without the need for an additional trial.

The OND recommended Cell Therapeutics will have to conduct an additional independent radiologic review utilizing a new independent panel of radiologists of the PIX301 trial to determine the soundness of the primary endpoint. The company will also submit new information regarding circumstances of stopping the PIX 301 trial early.

In June 2011, the company received guidance on how to proceed with the resubmission from the Division of Oncology Drug Products (DODP). The DODP focused on the information which the company proposes to submit and on the composition of the new radiology expert panel. The DODP will review the NDA within 6 months of the resubmission. Cell Therapeutics will re-submit the NDA in the fourth quarter of 2011 and anticipates receiving approval in April 2012.

The decision from the OND has removed a major overhang for Cell Therapeutics and revived the prospects of pixantrone. The company has been saved 2-3 years time by getting the opportunity to file on the basis of the original completed trial PIX301 instead of the new trial PIX306 which the company began in March 2011.

The company has also filed a Marketing Authorization Application (MAA) for the candidate in Europe. The drug is expected to be approved in EU in early 2012. Approval of the drug in the Europe will boost Cell Therapeutics’ top line and provide it with some much needed funds.

The company’s other late stage oncology pipeline candidate, which includes Opaxio (being studied for the treatment of ovarian, esophageal and brain cancer) and tosedostat ((being studied for hematopoietic cancers such as acute myeloid leukemia (AML), myelodysplastic syndrome (MDS) and multiple myeloma (MM)), will be synergistic with pixantrone. The company has a global licensing deal with Novartis (NVS) for Opaxio and will receive substantial royalty payments from Novartis once the drug is approved. Tosedostat has demonstrated encouraging responses as a single agent therapy in treating hematopoietic cancers such as AML, MDS, and myeloma which resonates well with Cell Therapeutics’ experience.

However, we prefer to remain on the sidelines as Cell Therapeutics is heavily dependent on the approval of pixantrone. Therefore, any delay in gaining approval would be a major blow for the company. Even if pixantrone gains approval it will face tough competition from several established products in the market. One of the top-selling drugs for the treatment of NHL is Biogen/Roche’s (BIIB/RHHBY) Rituxan. Other competing products include Sanofi Aventis’ (SNY) Campath, Takeda’s Velcade and Cephalon's (CEPH) Treanda.

 
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