The Curious Case of Synta Pharmaceuticals

Synta Pharmaceuticals ($SNTA) is a small US biotech with a market cap $343m.  Their 'mission' is as follows (taken from their website).

Our mission at Synta is to extend and enhance the lives of patients with severe medical conditions, including cancer and chronic inflammatory diseases. We aim to create the best place for the best people to create breakthrough drugs that change medical practice.

Their lead drug candidate is a Hsp90 inhibitor Ganetespib which is currently in clinical trials for the treatment of cancer, such as phase III for non-small cell lung cancer NSCLC. However, before I go into their portfolio, I think it is worth looking at a chart first of the stock price.

Below is a weekly chart from the past 2 years, current price is at new lows, -35% just this year. The stock has fallen out of favour with the market, so I will try to fill in the gaps to understand what has happened the past year.

Firstly let's take a look at Synta's portfolio. We can see that they are not just an early stage research company, with Ganetespib as their lead candidate in phase II and phase III clinical trials.

I think it's fair to say this is the main project in the company and is driving most of its value. Indications being trialed against are NSCLC, breast cancer, ovarian cancer and AML (acute myeloid leukaemia). I think it's worth understanding a bit more about Ganetespib, I will summarise from their website:

"....a small molecule inhibitor of heat shock protein 90 (Hsp90), a molecular chaperone required for the proper maturation and activation of numerous client proteins. Many of these Hsp90 client proteins play critical roles in cell growth, differentiation, and survival. Relative to normal cells, cancer cells are more reliant on elevated levels of the active form of Hsp90 and, as such, appear to be selectively sensitive to Hsp90 inhibitors, including ganetespib."

This make Hsp90 a very attractive target for oncology as you are potentially inhibiting many pathways at the same time. This in turn potentially increases your success in killing cancer cells as well as overcoming resistance, as drug efficacy is not reliant on just blocking one pathway (see here slide 3 for nice diagram)

"Cancer cells often develop resistance to commonly used anti-cancer treatments such as chemotherapy and radiation therapy........ Inhibition of these client proteins supports combining ganetespib with chemotherapy or radiation therapy in order to investigate whether the combination reduces resistance and improves potential clinical activity. In preclinical models of cancer, ganetespib has shown synergistic activity with chemotherapies including docetaxel, paclitaxel, pemetrexed, gemcitabine, cytarabine, irinotecan, etoposide, doxorubicin, carboplatin, cisplatin, and vincristine as well as with radiation therapy."

So this is interesting from both a scientific and commercialisation perspective. The strategy is to combine Ganetespib with current treatments to combat drug resistance of the disease, as preclinical models have shown additional cancer killing effects by combining drugs. We can also see in the clinical trial designs Ganetespib has been used in combinations to compare with standard single treatments.

"In advanced stage disease, tumors develop properties that allow them to spread throughout the body. These include the activation of pathways that regulate new blood vessel formation (angiogenesis) and those that enable cancer cell separation from primary tumors and establishment of new tumor lesions (metastasis). Many Hsp90 client proteins play key roles in these processes.
....In preclinical models, ganetespib has shown an ability to inhibit these proteins and suppress these aggressive properties."

Another positive result for this compound in preclinical models. All this adds up to an interesting target, an efficacious compound and a drive for the clinic. 

A quick search reveals Vernalis also have a Hsp90 inhibitor, AUY922, in phase II trials in collaboration with Novartis and Cancer Research UK here and here.

So where has it gone 'wrong' for Synta's stock price? Well, to start we need to take a look at the results from the GALXAY-1 trial where Ganetespib was used in combination with docetaxel and compared with treatment of docetaxel alone as a second line treatment for patients with NSCLC. 

The update from the trial in June 2013 here, here and here was poorly received by the market, as any additional survival rates were not seen as statistically relevant unless the some patients were separated as 'normal progressors'. Deterioration in the positive data was also seen from the previous update of the trial, the stock tanked.

In October 2013 the company then released 1 year follow up results here, which were described as 'encouraging' (a hazard ratio below 1 means the drug has a beneficial effect compared to the control group).

"Overall survival Hazard Ratio in the chemosensitive population was 0.75 (90% CI 0.56, 1.03; 1-sided p=0.065) and 0.72 (90% C.I. 0.52, 0.98; 1-sided p=0.040) in the Cox proportional hazards univariate (unadjusted) and multivariate (adjusted) models, respectively. Median overall survival was 10.7 months for ganetespib and docetaxel versus 7.4 months for docetaxel alone."

However, some were not convinced here and here referring to the hazard ratio of 0.75 even in the selected patients as 'non significant' and worries over the subsequent expansion of the phase 3 trial. It seems the overall market agreed, the stock tanked again, revisiting the $4 level.

Curiously in November an update here the company revealed they would no longer be involving patients from two Eastern European countries

"Analysis of data to date revealed that medical profiles from certain patients enrolled from two Eastern European countries differed from patterns typical of patients enrolled from other countries in this study, as well as patients enrolled in other clinical trials for the treatment of advanced second-line NSCLC. This observation informed the operational plan for the ongoing GALAXY-2 Phase 3 trial, including the decision to limit further enrollment from these two countries."

Reading the Q3 2013 conference call here it seems patients from these centres had less advanced cancer and skewed the results as they would need a longer time frame to see any benefits. The hazard ratio for just the Western countries fell to a far stronger 0.5.

Suddenly, in March this year, the CEO and co-founder Safi Bahcall resigned here without explanation. Some speculated this meant the GALAXY-2 trial was in danger of  being cancelled here. Since then a new CEO Anne Whitaker has been hired, however the question remains if this has removed uncertainty with investors, especially over the continuation of GALAXY-2 trial (see later).

Then in May this year the final analysis of the GALAXY-1 trial were released here. Favourable hazards ratios for the chemosensitive patients were released and it was concluded these type of patients would be used in the GALAXY-2 phase 3 trial.

It is not clear if and where the data from the Eastern European countries referred to back in November is included.

By now the stock price had already fallen again after recovering from November 2013 and hitting March 2014 highs. The stock has even dropped an additional 15% just this month, essentially on no news, well not any I can find anyway. Yahoo finance board members seem to be blaming the new CEO here.

I will try to summarise possible reasons for the recent decline

• Market simply doesn't like the GALAXY-1 results and are still selling off - low probability, markets shouldn't take so long to react to new information.
• Market is starting to believe GALAXY-2 won't go ahead, my understanding is the trial is still in enrolment phase - medium probability, (see thesis below)
• Momentum and biotech traders leaving the stock - high probability, value difficult to discern, many biotech buyers/sellers I believe are traders looking for price action.
• Investors not impressed by new CEO Anne Whitaker, badly enough to sell - medium probability, too easy to fall into 'blame game' but I believe her silence is odd and adding to doubts in the company (see thesis below)
• A new piece of negative information has reached some investors and I cannot find it - medium probability, my data sources of course and not unusual for a stock to move before a new announcement. 

It is also worth noting at this point that current cash resources should last until at least Q4 2015 (according to the company), this is sufficient to reach GALAXY-2 interim results but not the whole way through the study. The company strategy is the have the resources to finish the study before going into partnership to further develop the drug. This could mean another round of a stock offering to raise funds as was done in late 2013, however this has been clear to investors for a while.

I think it's fair to say sentiment in the stock is low, a year ago the market thought it was worth $7, now it will only pay half that. However, lets try to summarise all the above information to build a bullish thesis and bearish thesis that can be outlined for investors in Synta

Bullish
The GALAXY-1 phase II clinical trial did its job in highlighting which patients respond best to the Ganetespib (i.e. 'chemosensitive') and with better control over the patient population by removing Eastern European centres from the trial gives the best chance for a positive outcome in the GALAXY-2 phase III clinical trial (this of course is no guarantee of success, as is the case with all phase III trials). The market has over reacted to the changing and uncertain data, reacting in a knee jerk manner. The upside now outweighs the downside.

Bearish
The results form the GALAXY-1 phase II trials are at best weak and possibly even statistically insignificant. Synta have repeatedly moved the analytical goalposts and changed the patent population to be able to find good enough data to progress the compound. Resignation of co-founder Safi Bahcall shows there is ongoing debate in the company whether to even continue with the GALAXY-2 trial. New CEO Anne Whitaker has not made any statements on supporting the trial (or anything else for that matter) increasing possibility it will be cancelled or at least it is being considered.

To be fair it would be reasonable for me for a new CEO to dive into the portfolio first to fully understand the companies projects before giving statements about future strategy. The flip side to that of course is that she is looking intently at the GALAXY-1 data to either be convinced or understand it enough to give it her backing. Until she says so otherwise it is my current conclusion that it cannot be ruled out that the GALAXY-2 study will be stopped.

Even if say GALAXY-2 was abandoned that does not kill Gatenespib as a drug, there are still trials ongoing to treat breast cancer (I-SPY), ovarian cancer (GANNET53) and acute myeloid leukemia  (AML-LI-1, AML-18, AML-19). You could always argue that the cash would be better off being spent on these studies instead.

Interestingly on the plus side, retired hedge fund CEO and current Synta director Bruce Kovner here is the largest shareholder owning a significant chunk of the company at 33%. He even increased his stake as recently as April 2014 buying another $5m worth of stock here.

I've not been able to fully connect the dots to understand fully how this works but Kovner used to be the CEO of Caxton Associates LP here, yet there seems to be a Caxton Corp which has 94% if its funds invested in Synta, see 13F here. Regardless of the details, Bruce Kovner has a significant sum of money invested with Synta Pharmaceuticals and would imply he believes in the future of the companies portfolio. 

At this point I would ideally like to come up with some valuation of the company. Purely looking at price action doesn't tell you if the stock has gone from very overvalued to just overvalued or ideally to undervalued.

Looking at some financials (trailing 12months) shows the options in valuing of this stock are limited as there are no sales and negative earnings.

• No revenues
• -$1.14 EPS
• $0.73 Book value per share (P/B= 4.7)
• $96.8m in cash and cash equivalents

The best option is a discounted cash flow method using assumptions on how much cash flow the company can generate if Ganetespib is approved and commercialised with a partner. Investment firm Jefferies has predicted peak sales of $425-$600m here but I've not been able to find any more information on these figures. It is unclear which types of cancer this is for and I am assuming these sales would be shared between Synta and any potential collaboration partner who would commercialise and use its sales force to sell the drug.

A valuation of Synta Pharmaceuticals will be the topic of a new piece in the near future.