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Biotech Stock Mailbag: Cell Therapeutics and the Ariad Hostile React-o-Meter Meltdown

BOSTON (TheStreet) -- In this week's Biotech Stock Mailbag, it's time to revisit Cell Therapeutics (CTIC).

The current investment thesis for Cell Therapeutics centers on pacritinib, an experimental Jak-2 inhibitor for myelofibrosis. In November, Cell Therapeutics signed a development and marketing partnership for pacritinib with Baxter (BAX). A phase III study of pacritinib in myelofibrosis is underway, with a second phase III study expected to start shortly.

Nothing else in Cell Therapeutics' pipeline has any significant value. Assume all other pipeline drugs fail. I'd also assign minimal value to the approved lymphoma drug Pixuvri because Cell Therapeutics will struggle mightily to generate sales in Europe and the drug isn't ever likely to receive U.S. approval.

Today and into the future, Cell Therapeutics is pacritinib. Those who know me and my combative history with Cell Therapeutics may be shocked at the next statement, so sit down.

Pacritinib could be a real myelofibrosis drug.

Sorry if that freaks you out a little, but it's true.

Based on the phase II data presented to date, pacritinib appears to be a bit less effective than Incyte's (INCY) Jakafi but perhaps better tolerated. Jakafi causes low platelet counts and anemia, often requiring myelofibrosis patients to discontinue treatment or lower the dose. For the same reason, doctors are hesitant to prescribe Jakafi to myelofibrosis patients with low platelets at baseline.

Pacritinib doesn't appear to have a negative effect on platelet counts, so the most reasonable (conservative) assumption to make is that the drug, if approved, could find a niche as a treatment for myelofibrosis patients with 1) baseline low platelets, or 2) who are intolerant to Jakafi.

Of course, this pacritinib profile needs to be confirmed in the ongoing phase III studies. Pacritinib is not without its own safety concerns, either. The drug causes relatively high rates of diarrhea, nausea and vomiting, based on the phase II data. Whether these gastrointestinal side effects adversely affect the drug's tolerability profile overall (and efficacy) is something to consider.

Incyte doesn't report fourth quarter and 2013 financial results until next month but it looks like Jakafi will generate roughly $400 million in worldwide sales. This is the drug's second full year on the market since launch in November 2011.

Street consensus for 2014 U.S. Jakafi sales is approximately $330 million. Add in another $200 million or so in ex-U.S. sales and call Jakafi a $500-$600 million drug next year.

What does this mean for pacritinib sales? Hard to say without any phase III data on hand, but a reasonable -- generous -- assumption would be $300 million in myelofibrosis sales two years post approval. In other words, pacritinib sales will be about half of Jakafi.

Why half? It's a nice, round number. Jakafi has a healthy head start and a better oncology drug marketer behind it (Novartis (NVS)) than pacritinib will with Baxter. I don't believe pacritinib will demonstrate superiority to Jakafi so it's going to be more of a second-line myelofibrosis drug. Half may prove overly optimistic if Gilead Sciences (GILD) secures approval for its myelofibrosis drug momelotinib. That's another wild card to keep in mind. And then there's Geron (GERN) and Imetelstat -- don't forget those guys.

What's pacritinib sales of $300 million in 2017-2018 worth to Cell Therapeutics today? Using reasonable assumptions, risk adjustments and sales multiples, my NPV calculator spits out an enterprise value of $400 million.

Cell Therapeutics' enterprise value today: Just about $400 million. 

Valuation is a subjective art, but I don't see a lot of fundamental upside in Cell Therapeutics from here. The stock will certainly be volatile around the release of pacritinib phase III data later this year, so trade accordingly.

My explanation of the Ariad Pharmaceuticals  (ARIA) short thesis countering the rumor of an imminent takeover by Eli Lilly  (LLY) or some other large pharmaceutical company caused the Hostile React-o-Meter to melt.

Most of the comments I received were along these lines: "Go [bleep] yourself you illiterate bald [bleep.]" I recommend reading the messages published under my Ariad blog post. Angry Ariad speculators have fallen prey to confirmation bias. You should also read Kid Dynamite's wise take on the subject.

A couple of readers did post intelligent comments supportive of the Ariad takeover thesis.

"Kong" offered multiple reasons why Ariad is a good buyout candidate. I'll post each one followed by a response.

Kong: Ariad is exactly the kind of small biotech that the Big Pharma are looking for to augment their pipelines and drug development programs.

Me: Perhaps, but the same can be said for many other small biotech companies. Those with promising platform technologies or drugs that are growing, not regressing, are more attractive than a company like Ariad.

Kong: A proven commercial tyrosine kinanse inhibitor drug for CML [Iclusig] that is probably the best in class and already bringing in revenues.

Me: Hmm. Iclusig is not best in class. The drug has been re-introduced to the market with a restricted label for a small portion of CML patients with the T315i mutation. Iclusig's revenue potential has shrunk considerably. The drug will never be used in the CML front-line setting, as previously hoped.

Kong: [Iclusig] looks very promising for GIST (refer to the melting liver mets presentation, available online.) Same drug may have potential in several other cancers -- just needs clinical trials to verify.

Me: Ariad may expand Iclusig's use to other cancers, but the drug's troublesome toxicity profile remains an overhang. There is plenty of competition in GIST.

Kong: Late phase clinical ALK Inhibitor drug [AP26113] showing excellent results on NSCLC including brain mets and low toxicity -- may be best in class.

Me: The efficacy of Ariad's ALK inhibitor AP26113 in lung cancer is no different from Novartis' LDK378. This week, Novartis announced that LDK378 was filed for U.S. approval as a treatment for ALK-positive lung cancer patients who no longer respond to Pfizer's  (PFE) Xalkori. Ariad is only just starting a pivotal study of AP26113, so the drug is far behind.

AP26113 might be differentiated by its ability to better treat lung cancer patients with brain metastases, but comparable data from LDK378 has never been published, so we don't know if AP26113 is unique in this regard.

There is also substantial competition from ALK inhibitors under development by Roche, Tesaro  (TSRO) and others.

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