Kancera - Big gains but what are investors really getting for their money?

Kancera is a small biotech company traded on the NASDAQ OMX North that focuses on new medicines for the treatment of cancer homepage. Before I dig any deeper into the company and science I'm going to show a chart of the share price to show what massive gains this stock has had.

The mind boggling numbers can be summarised as follows

• 12 months +954%
• 3 months +375%
• 1 month +198%
• 1 week 144% (!)

It currently trades at a market cap of 773 MSEK ($108.3m) and P/B 22.9. It goes without saying that it has negative earnings, due to current investments in R&D.

I think it's fair to say this is a popular stock and probably attracting lot of speculative money, or worse people who think they are making fair investment but are not. We shall hopefully find out. So what are Kancera actually doing science wise? They have three ongoing projects in their research portfolio, which focus on cancer

• A ROR inhibitor described as follows

".....which can reprogram cancer to make it destroy itself. ROR inhibitors have been shown in the laboratory to be effective against both solid tumors and leukaemia."

The strategy has modified lately in which they plan to combine it with a ROR vaccine.

"Kancera´s strategy is to use its future small-molecule ROR inhibitors as a first line treatment for the disease to remove the main part of the tumor and the symptoms, and thereafter follow with a prophylactic ROR vaccine to prevent relapse. Thus, there are possible synergies between Kancera´s small molecule products and the vaccine against ROR."

• Small molecule PFKFB inhibitors 

".....substances capable of making cancer more susceptible to chemotherapy by modifying cancer cell metabolism in solid tumors using what are known as PFKFB inhibitors."

• Small molecule HDAC inhibitors

".......drugs aimed primarily at neutralizing leukemia by inhibiting epigenetic processes, such as those that control gene activity."

Sounds exciting, new drugs will always be welcome and needed in treating patients with cancer. The strategy seems to be to take these new treatments to a pre-clinical stage at which point they would partner with large or mid pharma who would have the competencies and assests in place to start the clinical trials. This makes sense, these trials can cost a lot of money and is a typical strategy for small biotech's.

We need to take a look at the latest 2014 Q2 report to get an idea at what stage these projects are at.

"Kancera has reported results from the collaboration on PFKFB3 inhibitors with Professor Thomas Helleday at the Science for Life Laboratory which was initiated in 2013. Within the framework of the collaboration a large-scale laboratory evaluation of synergistic effects between Kancera’s PFKFB3 inhibitors and a large number of approved drugs has been performed. The results show that synergistic effect against cancer cells can be achieved by combining PFKFB3 inhibitors and some defined classes of approved drugs. In light of the present results, new experiments are planned using preclinical disease models to verify whether PFKFB3 inhibitors can improve the treatment of advanced lung cancer and metastatic breast cancer."

Certainly promising results in proving how their PFKFB3 inhibitors can treat cancer but we are talking mid to early stage research here. It is possible to watch an interesting presentation by Thomas Olin VD here from the start of the year. From that I take these are experiments to prove a role of the target but they need to do more research to improve the inhibitors as drugs.

Next we have the HDAC inhibitors which also seem to be at early stage research

"Kancera hereby announces that the development of the HDAC6 inhibitors are progressing faster than previously estimated in the second quarter when HDAC6 inhibitors were developed that are more potent against cancer cells than Acetylon´s ACY-1215 and also better tolerated by healthy human blood cells."

Again promising results and I wish them every success but we are a long long way from a clinical candidate. If all it took was to treat cancer cells in a laboratory then cancer would have been cured a long time ago. There are still many challenges to go. It's difficult to put a probability of success on these projects, they could potentially never get beyond the early research stage. It happens all the time.

As an investor I think you are paying for what I would call 'optionality' with these projects. It's possible to loose everything but huge upside if the small probability event goes your way.

I would say their ROR project is the flagship of the portfolio and seems more developed than the others.

"Kancera hereby announces that animal studies are proceeding according to plan towards the selection of a candidate drug in Q3. The results so far support that an effective concentration of the ROR inhibitor can be achieved in cancer cells for long enough to reach the desired anti-cancer effect. Animal studies are currently being conducted in order to assess efficacy and safety, why risks in the development of the drug candidate in the ROR project remains."

This is more like it, we are now getting much closer to a clinical candidate that they hope to partner with established pharma in the future. It sounds like they are achieving the desired concentration of drug in the system, which is good of course, but no news as yet if it has any effect. This will come I assume after the end of the study.

A word of caution this still does not mean the desired effect will occur. There are 3 major likely outcomes - Nothing, cancer unaffected (the worst - what went wrong?), maybe the cancer shrinks but by not very much (then you have a debate on why?!) or the best scenario, it goes exactly to plan then it's full steam ahead!

These still doesn't address unexpected effects (good or bad) or a poor safety profile which may prevent further development of this particular substance tested. What will happen to the share price if this one animal study does not deliver to everyones hopes? This is a question that all serious investors must ask themselves. What is the downside risk or at least how do I limit it?

In terms of financial rewards Kancera point towards the deal done by Pharmacyclics and Johnson&Johnson for their new anti-cancer drug Ibrutinib. So far J&J have coughed up $150m in milestone payments and could pay out even more, another $825m (see presentation mentioned above and here)

Pharmacyclics is now valued as a $9bn company and trades at P/E 105, looking at their website they have the one drug launched. If Kancera matched that, then we are talking x83 fold move in share price from its current market cap, that though is a big 'if'!

To get a sense of perspective the success rate of cancer drugs from Phase 1 to launch has been recently shown to be about 10% here. From a preclinical stage the probability of success will be much smaller.

Kancera also cite a deal between Celgene and Agios who payed $120m plus royalties for rights to their phase 1 candidate drug AG-221. The stock jumped 28% or around $330m on the phase 1 results.

Interestingly the investor website aktieinvest attempted to make a valuation of Kancera back in March and concluded a market cap of between 123-539 MSEK if both the ROR and PFKFB3 projects received milestones in the coming years. The current share price is about 50% over the higher end. I won't go into the details here (in Swedish) but they use a previous deal between KaroBio and Pfizer as it's basis, look at the probabilities of reaching different stages and even the possibility of both drugs being launched as 'orphan designated drugs'.

What else on top of the projects mentioned are investors getting for their money when paying  for Kancera with market cap if 773MSEK? Not much is the answer.

• 33.8MSEK in equity (P/B 22.9)
• Of which 6MSEK is intangibles
• Patents covering current research
• -17.93MSEK in earnings
• 7.5 employees

Despite the interesting research and desirable goal of new cancer treatments Kancera stock cannot be seen anything more than a speculation and must be traded as so. There are high hopes by investors of huge gains on the launch of a new drug to treat cancer yet the probabilities of those gains are very low.

Of course things could work out very well for Kancera and stockholders will end up being very happy with the results, even if they buy at these levels. However, if you run across a motorway and survive doesn't mean it was prudent to do so!