Newsletter

Callisto Pharma: Fast Track FDA Approvals Targeted

October 1, 2005
Volume VI, Issue 85
Home Page : www.otcjournal.com
Email Questions or Comments To: editor@otcjournal.com

To OTC Journal Members:
 

Comments in the BLOG

There are no new BLOG postings so far this week. I like to save the BLOG for extreme volatility commentary, but there isn't much moving to either up or down extremes at this time. Nevertheless, a few of our recent features are starting to behave a little better; NWKI and HESG are trying to work higher. I'm working on an update on BPTR for next week, which is also trying to work higher. Use the BLOG for any observations or questions you may have.

To use the BLOG, simply go to the home page at www.otcjournal.com - the BLOG will scroll down automatically on the right side of your screen. The most current journal entries appear in the middle of your screen. Check back frequently for updates particularly when stocks are moving to overbought or oversold levels or in volatile markets. Your questions and postings do not automatically appear, so don't bother posting the same question multiple times. I personally go through to moderate and respond to every question.

As chronicled in the September 10th edition, I believe biotech is the next big thing on Wall Street. Technically, the biotech index looks ripe for a move to the upside. Small and microcap biotech stocks have taken a beating in 2005, and are ready for a significant and sustained bounce. There is a favorable demographic as represented by the huge bulge of aging population known as the baby boomer generation. New medical technology will experience a major surge in demand. At the same time, the empty pipelines at big pharma is driving innovation in small cap companies.

The Stanford Group, a unbiased institutional research house, has rated today's idea a "Buy" with a 12 month price target of $5. They base their conclusion on a 2009 earnings estimate of $.36 per share with a 25% discount rate and a 30 multiple. They also believe the valuation as compared to peer group companies suggests significant upside. More details below.

If the Stanford Group is right, a position at Friday's closing level would equate to a 281% return on invested capital. For your consideration:
 

Callisto Pharmaceuticals (AMEX: KAL): Fast Track FDA Approvals Targeted

Callisto is in the business of developing new drug therapies to treat cancer. Specifically, KAL has targeted hematological cancers, or cancers of the blood. These types of cancers represent a challenge as there is no specific tumor or localized site to treat.

Management at KAL is focused on becoming commercially viable as quickly as possible. To that end, they are focusing of treatments for "relapsed" patients. These patients have typically received prior chemotherapies, and are not improving.

Both of the KAL therapies in clinical trials have been granted "orphan drug" status. This unique designation gives KAL exclusivity from competition once an FDA Approval has been granted for a period of 7 years in the US.
 

Products

New drugs must go through the FDA Approval process. There are three Phases of studies- I, II, III. In very oversimplified terms, in Phase I you make sure it's not toxic. In Phase II you test it on a small group and see if it works. In Phase III, you test it on a larger group, track efficacy, and experiment with dosages amounts.

The two products KAL currently has in clinical trials are as follows:

  • ANNAMYCIN

Annamycin is being developed to treat relapsed Leukemia, specifically the ALL and AML versions of the disease. The market size for this drug is approximately $300 million annually.

Leukemia is a cancer of the blood cells that originates in bone marrow. White blood cells become malignant, and they interfere with the work of both normal white and red blood cells. The body has difficulty healing and fighting infection. Leukemia cells are pictured to the right.

In a Phase I/IIa study on 20 patients in which the dose of the drug was escalated, two of the twenty patients exhibited complete remissions at higher doses, a clear indication of a positive drug effect. This kind of clinical data makes Wall Street stand up and take notice.

The next phase of clinical trials for Annamycin will begin later this year, and positive data from those studies could serve as a catalyst for an improving stock price.

  • ATIPRIMOD

Atiprimod is being developed to treat relapsed Multiple Myeloma (MM). MM is an incurable cancer that develops in bone marrow and causes lesions to form. The estimated size of the market for Atiprimod is about $250 million annually.

It's an oral drug that inhibits tumor growth. KAL is currently exploring this drug at four medical centers around the US.

KAL might try positioning Atiprimod for a post Phase II FDA approval, as the regulatory pathway was cleared by a drug called Velcade. Velcade was given accelerated approval. In a pivotal study of 188 patients, Velcade yielded partial remission in only 25% of patients, indicating how desperately new drugs are needed to treat this terrible disease. Despite the modest result, the drug was approved for use.

Atiprimod is currently in two Phase I/IIa studies. Early pre clinical studies are promising. The drug proved effective in animal studies, and positive clinical data from the current ongoing studies could have a positive effect on the share price when the market takes note.

Annamycin and Antiprimod are two products in clinical trials now, but there are other therapies in development. For example, KAL is jointly developing a Superantigen Platform treatment of bioterrorism agents. The Army and NIAID have provided grants totally $2 million. KAL is collaborating with Rockefeller University and the US Army Research Lab on the project. 
 

Comparable Companies

The Stanford Research Reports identifies three comparable companies to help establish the $5 price target as follows:

  • Vion (NASDAQ: VION): Vion has no revenues and a market cap of about $150 million. The company has two compounds in clinical trials for Leukemia treatments.
  • Bioenvision (NASDAQ: BIVN): BIVN is also an oncology company with two products in clinical trials. Market cap: $323 million.
  • Cell Therapeutics (NASDAQ: CTIC): CTIC also has two products in development to treat Leukemia and MM. Market cap: $183 million.
Conclusion

Accordingly to recent SEC filings, KAL currently has 31.2 million shares I&O. Based on Friday's closing quote of $1.31, the market is placing a value of about $40 million on the company.

VION, BIVN, and CTIC are all companies in similar stages of development. Yet, the lowest market valuation of the three is currently $150 million, with the average valuation coming in at $218.6 million.

Therefore, if KAL can achieve the average valuation of the three comps, the stock would trade at $5.46. Hence- Stanford Research's target price of $5.

Moreover, KAL is entering into a period of time when it anticipates releasing clinical data on the two drugs it currently has in trials. In the biotech arena it is clinical data and the perception of future value that drives stock prices, not sales and earnings.

Technically, the stock appears poised for appreciation in both the short and long term. Here's a weekly chart dating back to the beginning of 2005. I like the way the volume has been improving steadily since the mid April time frame, suggesting the investor audience is growing for KAL.

In addition, the stock has never traded much below the $1 level. This floor suggests in the $1.25 to $1.50 range there is reasonable downside risk for an aggressive investment.

Short term, the stock has just completed a double repo of the 3x3 displaced moving average to the upside. It broke above the 3x3 once, came back below, and broke it again at a higher level. You see the breakout circled in blue.

This chart suggests the stock could easily move into the $1.60 to $1.75 range in short order.

As usual, limit orders are suggested. At this time, accumulation anywhere under $1.50 is appropriate.  After studying the data and the comps, I would tend to agree that a $5 target level seems attainable over the next 52 weeks, assuming a backdrop of a moderately favorable market.


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