Novelos Therapeutics Inc.
Rating: Speculative Buy - 12 month price target = $3.00
NVLT $1.15 — (OTC BB) May 12, 2007
Rating: Speculative Buy - 12 month price target = $3.00
NVLT $1.15 — (OTC BB) May 12, 2007
Total Revenues (Millions)/ Earnings (loss) per share;
FY (12/05) - 0 M / (0.14)
FY (12/06) - 0 M / (0.20)
FY (12/07) E - 0 M / (0.25)
FY (12/08) E - 0 M
FY (12/09) E - 0 M
FY (12/10) E - 30 M
FY (12/11) E - 150 M
FY (12/12) E - 300 M
FY (12/13) E - 450 M
52 - Week range: $0.60 - 1.40
Shares outstanding as of 12-05-07: 39 million
Approximate float: 28 million
Market Capitalization $45 million
Novelos Therapeutics, Inc. (OTCBB: NVLT.ob) is a biopharmaceutical company commercializing oxidized glutathione-based compounds for the treatment of Cancer and Hepatitis.
Key Investment Considerations:
I am rating Novelos Therapeutics, Inc. (OTCBB: NVLT) with a Speculative Buy rating and a twelve-month price target of $3.00 per share based on the likelihood of success of its lead compound NOV-002 in Phase 3 trials, that were commenced in November 2006 under fast track designation from the FDA for non-small cell lung cancer (NSCLC).
Reduced Risk: NOV-002 is marketed in Russia by PharmaBAM under the trade name Glutoxim®, and has already been administered to over 10,000 patients, demonstrating clinical efficacy and excellent safety. Thus, the risk associated with this stock is significantly less than other early-stage biotechs, because NOV-002 is already approved in Russia and has been used successfully in THOUSANDS of cancer patients.
Billion Dollar Prospect: If successful, NOV-002 global sales in NSCLC could be greater than $1B by 2014. Lung cancer is a ~$1.5bil market in the US. Hepatitis C (NOV-205 candidate) is a ~$3bil market, projected to grow to $8bil by 2010.
Tolerance and Availability: Patients treated with NOV-002 are able to withstand many more cycles than conventional lung canvcer treatments, such as cisplatin alone. Glutathione, when combined with other chemotherapy drugs is able to reduce the side effect profile for the patient. Oxidized glutathione is simple and inexpensive to manufacture relative other chemotheraphy drugs such as Taxol.
Potential Glutathione Pipeline: The scope of activity of Glutathione, the active molecule in NOV-002, is being investigated thoroughly by Novelos. NOV-002 is also being investigated in a Phase II trial with Carboplatin in women with Recurrent and Platinum Resistant Tumors of Mullerian Origin. The company has also developed a pipeline drug candidate known as NOV-205 for treatment of hepatitis B and C, which is currently being tested in a Phase Ib study in the US.
Positive data from these studies should provide additional upside to the stock in the future, and could become a takeover candidate.
Valuation: Novelos remains undervalued relative to other early stage biotechs. As an example, CYTR (Nasdaq) has a Pipeline of: 2 phase II's, 1 phase I and numerous preclinicals, and has a market cap of 325 M. As soon as the investment community acknowledges the potential for Novelos to develop a portfolio of active Glutathione derivatives against a broad spoectrum of diseases, the market cap should rise accordingly.
Company Overview:
History: Novelos Therapeutics was originally incorporated in June 1996 as AVAM International Inc to capitalise on glutathione-containing drugs. In October 1998, the original Novelos Therapeutics was merged with AVAM and the resulting entity was Novelos Therapeutics Inc. In June 2005, the firm completed a reverse merger with Common Horizons Inc., and Novelos was the surviving firm. Between May and September 2005, Novelos raised $5 million in gross proceeds from a PIPE financing and $3 million in gross proceeds from a
convertible preferred financing. Subsequently, Novelos raised an additional $15 million in a PIPE financing in March 2006. Novelos Therapeutics recently announced the closing of a $15MM private placement. Thus far, the firm has raised $44 million through a combination of debt and equity offerings.
Pipeline and Developmental Milestones:
NOV-002 for Non-Small Cell Lung Cancer Phase 3 - under SPA and Fast Track
Q1 2008: Complete Enrollment
Q2 2009: Completion
Q2 2010: FDA approval and app.
NOV-002 for chemotherapy-resistant ovarian cancer Phase 2
Q3 2007: Initiation
NOV-002 for breast cancer
Q4 2008: Completion
NOV-205 for chronic hepatitis C Ph 1b
Q3 2007: Completion
Cash Burn: Novelos increased its R&D investments to $641,523 in Q1 FY06 compared to $157,589 in Q1 FY05. The company’s general and administrative costs expanded to $793,285 in Q1 FY06 from $195,515 in the comparable quarter a year earlier. The Company’s net loss was $1,354,086 in Q1 FY06 compared to $410,744 in Q1 FY05. These costs should continue to increase over the coming years as expenditure on clinical trials increases. Novelos is fully funded to mid-to-late 2008.
Projections: Rodman and Renshaw recently assigned a risk adjusted NPV for NOV-002 of 200M, which I beleive, at this time, is a low estimate. For example, they gave only a 40% probabilty of success as part of the NPV analysis of NOV-002 for NSCLC. This is despite the drug candidate already receiving positive Phase II results in the Russian study and now also in the US. As a point of reference here, as a drug moves through the pipeline and passes each hurdle, the risk decreases with each major milestone. Drugs entering Phase I clinical trials have a only a 15% probability of success. For phase II, the odds are around 30%, and for Phase III, 60%. Thus, if a probability of success of 60% was given, then the NPV becomes 300M, without any revenue from other cancer studies included at this time.
If positive phase II data can be obtained, then a similar risk adjusted NPV will add significantly to the valuation of this company. The pipeline and the exploration of further indications with NOV-002 are crucial to sustaining Novelos’ forward momentum as the Phase III program matures.
Summary: I believe that the long run prospects of the Company are positive. Its risk reward ratio advocates purchase of the stock. In the short run, the stock may be continue to be subject to high volatility and continue to trade at a significant discount to its market. Over the next few years as the story plays out, this situation should change.
FY (12/06) - 0 M / (0.20)
FY (12/07) E - 0 M / (0.25)
FY (12/08) E - 0 M
FY (12/09) E - 0 M
FY (12/10) E - 30 M
FY (12/11) E - 150 M
FY (12/12) E - 300 M
FY (12/13) E - 450 M
52 - Week range: $0.60 - 1.40
Shares outstanding as of 12-05-07: 39 million
Approximate float: 28 million
Market Capitalization $45 million
Novelos Therapeutics, Inc. (OTCBB: NVLT.ob) is a biopharmaceutical company commercializing oxidized glutathione-based compounds for the treatment of Cancer and Hepatitis.
Key Investment Considerations:
I am rating Novelos Therapeutics, Inc. (OTCBB: NVLT) with a Speculative Buy rating and a twelve-month price target of $3.00 per share based on the likelihood of success of its lead compound NOV-002 in Phase 3 trials, that were commenced in November 2006 under fast track designation from the FDA for non-small cell lung cancer (NSCLC).
Reduced Risk: NOV-002 is marketed in Russia by PharmaBAM under the trade name Glutoxim®, and has already been administered to over 10,000 patients, demonstrating clinical efficacy and excellent safety. Thus, the risk associated with this stock is significantly less than other early-stage biotechs, because NOV-002 is already approved in Russia and has been used successfully in THOUSANDS of cancer patients.
Billion Dollar Prospect: If successful, NOV-002 global sales in NSCLC could be greater than $1B by 2014. Lung cancer is a ~$1.5bil market in the US. Hepatitis C (NOV-205 candidate) is a ~$3bil market, projected to grow to $8bil by 2010.
Tolerance and Availability: Patients treated with NOV-002 are able to withstand many more cycles than conventional lung canvcer treatments, such as cisplatin alone. Glutathione, when combined with other chemotherapy drugs is able to reduce the side effect profile for the patient. Oxidized glutathione is simple and inexpensive to manufacture relative other chemotheraphy drugs such as Taxol.
Potential Glutathione Pipeline: The scope of activity of Glutathione, the active molecule in NOV-002, is being investigated thoroughly by Novelos. NOV-002 is also being investigated in a Phase II trial with Carboplatin in women with Recurrent and Platinum Resistant Tumors of Mullerian Origin. The company has also developed a pipeline drug candidate known as NOV-205 for treatment of hepatitis B and C, which is currently being tested in a Phase Ib study in the US.
Positive data from these studies should provide additional upside to the stock in the future, and could become a takeover candidate.
Valuation: Novelos remains undervalued relative to other early stage biotechs. As an example, CYTR (Nasdaq) has a Pipeline of: 2 phase II's, 1 phase I and numerous preclinicals, and has a market cap of 325 M. As soon as the investment community acknowledges the potential for Novelos to develop a portfolio of active Glutathione derivatives against a broad spoectrum of diseases, the market cap should rise accordingly.
Company Overview:
History: Novelos Therapeutics was originally incorporated in June 1996 as AVAM International Inc to capitalise on glutathione-containing drugs. In October 1998, the original Novelos Therapeutics was merged with AVAM and the resulting entity was Novelos Therapeutics Inc. In June 2005, the firm completed a reverse merger with Common Horizons Inc., and Novelos was the surviving firm. Between May and September 2005, Novelos raised $5 million in gross proceeds from a PIPE financing and $3 million in gross proceeds from a
convertible preferred financing. Subsequently, Novelos raised an additional $15 million in a PIPE financing in March 2006. Novelos Therapeutics recently announced the closing of a $15MM private placement. Thus far, the firm has raised $44 million through a combination of debt and equity offerings.
Pipeline and Developmental Milestones:
NOV-002 for Non-Small Cell Lung Cancer Phase 3 - under SPA and Fast Track
Q1 2008: Complete Enrollment
Q2 2009: Completion
Q2 2010: FDA approval and app.
NOV-002 for chemotherapy-resistant ovarian cancer Phase 2
Q3 2007: Initiation
NOV-002 for breast cancer
Q4 2008: Completion
NOV-205 for chronic hepatitis C Ph 1b
Q3 2007: Completion
Cash Burn: Novelos increased its R&D investments to $641,523 in Q1 FY06 compared to $157,589 in Q1 FY05. The company’s general and administrative costs expanded to $793,285 in Q1 FY06 from $195,515 in the comparable quarter a year earlier. The Company’s net loss was $1,354,086 in Q1 FY06 compared to $410,744 in Q1 FY05. These costs should continue to increase over the coming years as expenditure on clinical trials increases. Novelos is fully funded to mid-to-late 2008.
Projections: Rodman and Renshaw recently assigned a risk adjusted NPV for NOV-002 of 200M, which I beleive, at this time, is a low estimate. For example, they gave only a 40% probabilty of success as part of the NPV analysis of NOV-002 for NSCLC. This is despite the drug candidate already receiving positive Phase II results in the Russian study and now also in the US. As a point of reference here, as a drug moves through the pipeline and passes each hurdle, the risk decreases with each major milestone. Drugs entering Phase I clinical trials have a only a 15% probability of success. For phase II, the odds are around 30%, and for Phase III, 60%. Thus, if a probability of success of 60% was given, then the NPV becomes 300M, without any revenue from other cancer studies included at this time.
If positive phase II data can be obtained, then a similar risk adjusted NPV will add significantly to the valuation of this company. The pipeline and the exploration of further indications with NOV-002 are crucial to sustaining Novelos’ forward momentum as the Phase III program matures.
Summary: I believe that the long run prospects of the Company are positive. Its risk reward ratio advocates purchase of the stock. In the short run, the stock may be continue to be subject to high volatility and continue to trade at a significant discount to its market. Over the next few years as the story plays out, this situation should change.
