By Grant Zeng, CFA
· Celator exited 2Q14 with a strong balance sheet;
· Valuation attractive;
On August 7, Celator (CPXX) reported financials for the second quarter ended June 30, 2014.
There was no revenue for 2Q14.
R&D Expenses was $2.9 million for 2Q14, compared to $2.0 million for the same period in 2013. The increase in R&D expenses was largely due to manufacturing, clinical and regulatory activities related to the Phase III study of CPX-351 and an increase in compensation and stock option expenses.
G&A Expenses were $1.7 million for the three months ended June 30, 2014, compared to $1.1 million for the same period in 2013. The increase was primarily attributable to costs associated with commercial and strategic planning and investor relations and an increase in compensation and stock option expenses.
Total operating loss was $4.8 million ($0.18 per share) for 2Q14, compared to $4.0 million ($0.18 per share) for the same period in 2013.
As of June 30, 2014, Celator held cash and cash equivalents of $24.9 million, compared to $20.8 million as of March 31, 2014.
In May, 2014, Celator entered into a loan agreement with Hercules Technology Growth Capital (HTGC), a specialty finance company that provides customized debt financing to companies in life sciences and technology-related markets. Hercules will provide Celator with access to a term loan of up to $15 million.
The first $10 million of the term loan was funded at closing, and is repayable in installments over forty-two months, including an initial interest-only period of twelve months after closing. The interest-only period is extendable to October 2015, contingent upon completion of certain related development milestones. Pursuant to the loan and security agreement, Celator issued Hercules a warrant to purchase 158,006 shares of the Company's common stock at an exercise price of $2.67 per share. The remaining $5 million of the term loan can be drawn down at Celator's option at any time between December 15, 2014 and March 31, 2015. If Celator draws down the remaining $5 million of the term loan, the warrant will become exercisable for an additional 52,669 shares of the Company's common stock.
Current cash plus the loan balance is expected to last until 4Q15 and is primarily supporting the Company's currently enrolling Phase III clinical study of CPX-351.
We maintain an Outperform rating on Celator shares and reiterate our 12-month price target of $7.00.
Celator is a late stage specialty pharmaceutical company with a focus on cancer. The company has built a decent pipeline using its unique, proprietary CombiPlex platform technology and liposome/nanoparticle delivery system.
Celator’s lead clinical program CPX-351 is in a Phase III clinical trial and top line data will be available in 2Q15. CPX-351 targets AML patients. Completed Phase II studies demonstrated that CPX-351 was safe and well tolerated in AML patients and that the drug candidate achieved significant efficacy improvements over control in high-risk AML patient populations such as secondary AML and poor-risk first relapse patients. Based on the positive Phase II data, we believe CPX-351 has a high success rate in the ongoing Phase III study. We expect CPX-351 to be approved by the FDA in late 2017 and by the EMA in 2018.
Celator’s second program is CPX-1 for CRC. CPX-1 has completed a Phase II clinical trial for CRC. Other than CPX-351 and CPX-1, Celator has two preclinical programs: CPX-571 and CPX-8 for solid tumors.
In terms of valuation, we think Celator’s shares are undervalued at current market price. Currently Celator shares are trading at about $2.5 per share, which represents a market cap of $64 million based on 26.1 million outstanding shares. This undervalues Celator based on its relatively strong fundamentals. According to our model, we expect CPX-351 to be approved in 2017 by the FDA and in 2018 by the EMA. We model Celator will become profitable (EPS of $0.03) in 2018 based on CPX-351 sales of $35 million. Sales of CPX-351 will accelerate in 2019 after the company gains marketing experience and further market penetration. If we use a P/E multiple of 35x, coupled with EPS of $0.62 in 2019, and discounted at 25% for 5 years, we come up with our price target of $7.00, which represents a market cap of $182 million.
But keep in mind the risks. Since Celator is still a clinical stage company, there are still clinical and regulatory hurdles for the company to overcome. Even when CPX-351 is approved, there are still commercial risks since CPX-351 will be the first commercial product for the company. In addition, general market condition will also have significant impact on the company’s share price down the road. However, overall, we believe Celator is a name for investors with a long term investment horizon and high risk tolerance.
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