With Or Without You Cyclacel Is Going To Rise

I've watched this happen too many times now. A stock stagnates in the winter of investor apathy only to shoot up suddenly like the tendrils of a tulip in spring. By then of course, it's too late. Your inattention has cost you a fortune. But before I explain why this is the case with Cyclacel (CYCC) Pharmaceuticals allow me to give you two recent examples from my portfolio that illustrate why this phenomenon occurs in the first place.

Example 1: A Misunderstood Science Fosters Buyer Indecision - Sunshine Heart (SSH)

From April 23rd to July 1st, Sunshine Heart stagnated at just over $5.00 a share. During that time some of the best authors on Seeking Alpha tried without success to persuade you that the C-Pulse System was a technology for treating heart disease that could revolutionize the disease space. Three months later, after investors had ample time to digest the information and weigh it against the sizable risk involved, the stock began its meteoric rise to $12 a share.

Example 2: A Pragmatic Management Spurns Investor Trust - Novavax (NVAX)

One of my favorite stocks at the present time had for decades conducted numerous public offerings and changed its entire focus of scientific endeavor from hormones to vaccines. This at once infuriated and confused loyal investors creating a funk of malaise that the company is only now beginning to shake.

It's my contention that these two things - a misunderstood science and an entirely too pragmatic management have falsely depreciated the value of Cyclacel shares creating an unequaled buying opportunity. But before we examine the entirety of my bullish position, we have the following company overview from Cyclacel's website.

Cyclacel Pharmaceuticals, Inc. is a biopharmaceutical company developing oral therapies that target the various phases of cell cycle control for the treatment of cancer and other serious diseases. Three product candidates are currently in clinical development. Sapacitabine (CYC682), a cell cycle modulating nucleoside analogue, is in Phase 3 development for the treatment of acute myeloid leukemia [AML] in the elderly under a Special Protocol Assessment agreement with the U.S. Food and Drug Administration and Phase 2 studies for myelodysplastic syndromes, lung cancer and chronic lymphocytic leukemia.

My Thesis is Simple: Were It Not For an Over Zealous Management That Has Depressed Investor Optimism Through Aggressive Financing, Cyclacel's Pivotal Phase 3 (SEAMLESS) Trial Would Be Seen For What It Is - Well Designed With a Favorable Chance of Success.

Cyclacel stock is presently trapped in a three month range of 25 cents or 8% of the current share price after having fallen from a high of $8.18 on December 5, 2012 to today's price of $3.07 (up 10% in the past week however). Like Sunshine Heart and Novavax, I believe Cyclacel is ready to surge and that the climb will be as sudden as it is steep.

To begin our examination of Cyclacel's hidden value we must first look to the past and see how it got to where it is today. This will help us to understand why today's price is so low. To accomplish this, we'll start with a nine month chart that I've marked with the causal points of price-per-share decline.

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Before I go on, promise me you'll hang in there as this is some pretty depressing stuff. As you can see, Cyclacel Management has been very busy capitalizing their enterprise which has had an unfavorable effect on retail shareholders like you and I.

It began with a $20M common stock purchase agreement with Aspire Capital in December of 2012. Then there were two separate "preferred" stock agreements with Tang Capital which amounted to the selling of over a million aggregate shares. Each of these shares were granted generous cash dividends the issuance of which depreciated the value of the outstanding retail shares.

This created a two-tiered system of stock ownership whereby buying common shares made you a second-class shareholder. You can see the difference in the performance of the preferred shares over common stock in this graphic obtained from Forbes on May 6th of this year.

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Then there was the $5.5M settlement with Celgene over the use of Cyclacel patents in the development of Istodax, a blockbuster drug utilized in the treatment of cutaneous and peripheral T-cell lymphoma that came in far below investor expectations.

Shortly after that we have a $20M public offering through JMP Securities punctuated by yet another cash dividend to the owner of preferred shares.

It should be noted that during this period of time there were no negative news stories on the scientific front. In fact, there were several positive developments including material confirmation of Cyclacel's intellectual property in the form of the aforementioned sale of patents to Celgene.

The principle cause therefore of Cyclacel's falling market-cap can then be traced directly to matters of finance. And while everyone understands that financing public companies is a necessary process that we all must endure, retail shareholders of Cyclacel have grown weary of the drain. Once enthusiastic about the prospects of their company relative to the science of sapacitabine, they now turn to message boards and article threads maligning their former assets in deep seated frustration.

While this has been a considerable burden for past shareholders to bear and something that should give new investors due caution, it's also the fundamental reason the shares are ridiculously cheap and ready to shoot skyward.

The enormous market potential of Cyclacel science and technology has been obscured by soured investor sentiment. Regardless, Cyclacel now sits on a pile of cash that will comfortably see them into the year 2015 and the projected completion date of their pivotal Phase 3 trial.

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In the graphic above, you can clearly see a wealth of good new and solid statistics that aren't reflected in the current share price. But rather than dwell a moment longer on these peripheral points of interest, I want to dive into the Pivotal Phase 3 (SEAMLESS) trial presently underway evaluating sapacitabine in the treatment of acute myeloid leukemia or AML. This is the principle driver of value that we must now look at with fresh eyes unwearied by past events.

Cyclacel's Pivotal Phase 3 Sapacitabine (SEAMLESS) Trial Is Superbly Designed And Likely To Succeed

At the heart of the short thesis against Cyclacel's sapacitabine, you'll find condemnation of the use of Dacogen (decitabine) an unapproved AML treatment in both the control and active arms of the (SEAMLESS) study. This according to the naysayer is the fatal flaw that dooms (SEAMLESS) from the get-go.

This shallow contention is often met with an equally idle response that goes something like this: Yes, but the FDA has used unapproved drugs before and all parameters were co-authored by the FDA in a SPA (Special Protocol Assessment) agreement.

While I'll agree that the rejoinder trumps the assertion, one needs to understand why Dacogen is being utilized as a comparator and facilitator in this study.

Dacogen is My #1 Reason For (SEAMLESS) Success

Acute myeloid leukemia or AML is a blood and bone marrow cancer that disproportionately effects older adults and results in high mortality and poor quality of life. Left untreated the disease progresses quickly as you can see in the following slide provided by Cyclacel.

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Best supportive care is hospice with a life expectancy after diagnosis of 3.6 months. A slight improvement of a month or so takes place with patients deemed fit and able to undergo low intensity chemotherapy which is more efficacious than the intensive alternative given that the bodies of the elderly are often frail and harboring co-morbid conditions.

There hasn't been a newly approved drug therapy in the AML space since 1969. The closest call came in 2011 when Astex' (ASTX) Dacogen, already a FDA approved therapy in myelodysplastic syndromes or MDS failed to demonstrate statistically significant superiority over the control arm of low dose chemotherapy in Phase 3. That said, it was close. So close in fact that Dr. Xavier Thomas of the Edouard Herriot Hospital in Lyon, France and one of the lead investigators of the study said...

Compared with the accepted standard therapies used in this study to treat older patients with AML, Dacogen showed a clinically relevant overall survival advantage without major differences in safety.

Patients in the Dacogen arm of that study had a median overall life expectancy of 7.7 months compared with just 5 months in the control arm. Take a look at the following slide and you'll see that at 6, 12, 18 and 24 months Dacogen patients lived longer.

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So Why Then Did the FDA in Concert With Cyclacel Through a SPA Agreement Select Dacogen to be Used in Both Arms of the (SEAMLESS) Phase 3 Trial?

Because the (SEAMLESS) Phase 3 Trial addresses only those AML patients who are treatment naive and ages 70 and above. And in this segment of the AML population chemotherapy and transplant are simply not viable options. Consequently, off-label use of Dacogen has become the defacto standard of care in those patients seeking an active medical treatment.

Here is Cyclacel President and CEO Spiro Rombotis at the recently held JMP Securities Conference addressing the question.

The crash reality though is that according to official CMS records, cited by the FDA at a September 2009 ODAC hearing, only 30% of U.S. patients are offered chemotherapy and of those only 20% accept it. So something like 80% of the market is underserved among those that could receive chemo but either refuse it or are unfit. This presents an enormous challenge in trying to enroll a phase 3 trial because the number of patients that might be willing to go on this trial clearly are not very motivated after they go through the informed consent dialogue with their physician.

We began a consultation with the FDA the goal of which was to design a study that would meet the requirements for a SPA. Why? Because there's no approved drug in AML and if we were to use an active control we needed to have our back covered by having the agency specifically agree in a contract called a SPA that the control arm would be suitable. And if a trial met the pre-specified entry conditions shown on this slide - improvement of survival to the relevant ethical power, they would then consider it for approval.

And we were successful in that because despite the drama around decitabine, the control drug we chose to use remaining unapproved in the U.S., it is the only option apparently that physicians are choosing in droves.

Physicians are choosing Dacogen because despite its failure to meet the primary endpoint of its poorly executed study, it was subsequently approved in Europe for AML in the elderly and because it's the right thing to do. Prescribing low intensity chemotherapy to an elderly patient when you know that results in the shortening of their life by 2 months isn't ethical.

Additionally, a study without Dacogen in the control arm would not be populated quickly enough. And this study has enrolled twice as fast as the Dacogen Phase 3 Trial that began in 2006 and finished in 2011 because doctors and patients alike understand the efficacy and tolerability of both compounds.

Furthermore, through Cyclacel's (SEAMLESS) trial, Dacogen now receives an added new look in a properly structured trial giving the FDA a second opportunity to assess its benefits.

And this is what the FDA wanted! The success of this trial will offer the added benefit of official sanction to off-label use of decitabine (Dacogen) benefiting doctors and patients alike.

Three Reasons Why Cyclacel's (SEAMLESS) Trial is Better by Design

1. Decitabine and sapacitabine are the dynamic duo. Take a look at the graphic below that I've constructed demonstrating first hand the powerful results of the pilot and lead-in Phase 2 Trials of sapacitabine compared with the aforementioned readout from Dacogen's Phase 3 trail.

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In patients 75 years and older, sapacitabine used in conjunction with decitabine prolonged life by 49% or 3.1 months and this segment comprised 72% of treated patients.

Additionally, because sapacitabine is an oral treatment, patients tended to take their meds as opposed to giving up. Sapacitabine is taken from the comfort of home in capsule form while decitabine requires a trip to the local clinic and an intravenous drip.

While I understand that this is a financial publication, I'm going to take the opportunity now to address an issue that perhaps is irrelevant to an investment thesis or trial outcome. I have a bias here as I want this medication to succeed. When younger, I might have asked: "So what, a few months of prolonged life! What's the big deal?' And, I think that's a fair question.

A few months to someone at the close of their life often means an opportunity to write a will that has neglected to have been written or to visit loved ones who live far away and might not be able to visit at the drop of a hat. While I might choose personally to live out my life in hospice care anesthetized to the pain of my illness, I could easily see myself fighting for a few months of life that might allow me to see my sons or my daughter, or my grandchildren if blessed to have them.

2. Cyclacel in concert with the FDA chose the right primary endpoint - overall survival.

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Cyclacel is using Overall Survival as the primary end-point of this trial and not remission rate data as others have tried unsuccessfully to do. The FDA doesn't like overall survival to be ignored in any pivotal oncology study as Aveo (AVEO) shareholders are well aware.

Requesting a SPA agreement with the FDA has as many risks associated with it as benefits where the requesting party is concerned. Trial sizes can be made prohibitively high and you might not get the weak comparator you desired. However, when all is said and done it's reassuring to know that the FDA has approved all the parameters in your trial including its endpoints, the size needed to arrive at valid results and the comparator used.

In Aveo's case for instance, they chose the wrong primary end point ignoring overall survival and sought approval for frontline use while neglecting to go head-to-head against standard of care - Sunitinib. All of this could have been avoided by requesting and receiving a SPA agreement as Cyclacel has successfully done.

3. Cyclacel is targeting a disease space with woeful unmet need and is properly limiting the scope of its venture.

There are approximately 16,000 new cases of AML each calendar year. Of those, over half occur in patients age 70 and above. The heterogeneous nature of AML dictates a more refined treatment strategy especially when younger patients react so much better to chemotherapy and transplant.

A while back, I wrote an article that fleshed out the strategy taken by Seattle Genetics with respect to its first compound Brentuximab Vedotin, now known commercially as Adcetris. In that article, I mentioned the genius involved in a carefully planned, two part approach to FDA approval.

Select a disease space that hasn't had an approved drug in over 30 years.Limit the scope of approval to third line therapy thereby appearing non-threatening to big pharma interests

This is exactly what Cyclacel is doing with sapacitabine whether by coincidence or design. Sapacitabine is a new drug in a disease space without an approval in nearly 5 decades. Carefully corralling the patient population to reflect medicinal strengths of your compound while simultaneously keeping a low profile in the larger pharmaceutical industry is wise on both counts.

Moving Forward There Are Challenges For Cyclacel

There are some catalysts that will play out during the remainder of this year that will drive investor interest including the readout of Phase 2 endpoint data of sapacitabine in MDS and the continued enrollment updates relative to the (SEAMLESS) trial now at 40% of the required 485 subjects.

However, some of the catalysts aren't the kind to stimulate new investor interest as much as allay current shareholder worry. I'm thinking here of the periodic Drug Safety Monitoring Board or DSMB safety reviews in the (SEAMLESS) study. That happens after every 100 patients have been enrolled and the larger futility review occurs at patient marker 212.

But the biggest obstacle for Cyclacel will be regaining investor trust - once lost it's hard to get back. Public speaking venues like the JMP Securities Conference are a good place to start.

Here's President & CEO Spiro Rombotis addressing the two-tiered stock structure that's curbed investor happiness.

We have reduced an overhang in the company which is a preferred stock issue through exchanges which were put to the company, unsolicited by holders of the preferred stock that prefer to hold common as the preferred is capped in terms of its preference and clearly has no upside in the event of a transaction the preference is limited whereas owners of the common will get to participate in higher value should that become available.

I'm curious to know if investors from December of 2012 holding through today are comforted by those remarks. And not to be unduly hard on Mr. Rombotis but his task is made more difficult in that his public speaking affectation is more GQ than MD creating a mismatch of stylistic perception. This YouTube video is indicative of that.

And sometimes not trying is better than trying too hard. Here's Mr. Rombotis closing his JMP remarks.

I can promise you that there has been a lot of partnering interest that has come over the transom because others have noticed the data as well.

The critical thing however for Cyclacel will be to assure prospective shareholders that no more dilutive financing is on the horizon, no small task given that past behavior is the best indicator of future behavior.

At both JMP and the recently aired Q2 Conference Call, Mr. Rombotis repeatedly indicated that Cyclacel was well financed into the year 2015 and beyond the readout of the Phase 3 (SEAMLESS) Trial results.

More so than executive assurances, common sense tells us that Cyclacel wouldn't be able at this point to conduct another public offering successfully. The stock value has been depreciated to a point where it simply is no longer attractive to a large group of would-be investors at any discounted price.

In Summation

Whereas Cyclacel has been a nightmare of depreciation for shareholders from December of last year, it presents itself anew as unearthed treasure.

When we scan the horizon for investment opportunities in biotech matters of finance are crucially important. We need to ask three questions. How much cash do they have on hand? When was the most recent financing undertaken? And how long will that pile of cash last? The answers to these questions for Cyclacel are all positive and powerfully so.

Additionally, we've learned that the pivotal Phase 3 (SEAMLESS) Trial is better constructed and more likely to succeed than understandably sullen investors have perceived it to be.

Two Important Caveats

1. Investment in a micro-cap stock carries considerable risk. One failed DSMB review of the Phase 3 (SEAMLESS) Trial and share holder value could be cut in half or more. Are you prepared to assume that risk? If not, do not invest in Cyclacel or any other small-cap biotechnology enterprise.

2. In Cyclacel's particular case a failure in this trial might not be as devastating to shareholder value as I've alluded to above. Cyclacel has promising Phase 2 results with sapacitabine in MDS as well as a cell cycle pipeline that would all benefit from the $30M treasure trove now on the balance sheet.

With this peculiar combination of strength and hazard in mind, I'll be mapping out a profit taking strategy here to limit my risk exposure. At a 50% gain, I'll remove 33% of my principal returning to my original investment amount. I'll do this in order to greet any unforeseen calamity with a wry smile rather than a gnarly sneer.

I wish you well as always in your investment pursuits.

Michael Webb

Disclosure: I am long CYCC. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. (More...)

Additional disclosure: The purpose of my article is to provide information the accuracy of which is as good as the public sources it was derived from. If providing my opinions on matters related to any investment has entertained you then I have accomplished my only goal. Do not act on anything I have written. Rather, do your own due diligence and consult an investment professional before making any investment decision. Acting on what any one writer, including me has imparted to you is foolish at best. I have no better access to resources or gift of opinion formulation than you do. Do not act on anything I have written without doing your own research. There are a myriad of things which can happen in lieu of any forward looking statement I have made. Any stock featured in an article I compose is subject to all manner of influences which can change its value in dramatic fashion upwards or downwards. Invest at your own risk and attain the reward your efforts have wrought.

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