Gentium (GENT) is an Italian biotech company that provides unique treatment options to patients faced with rare diseases with high unmet medical needs. Gentium is an excellent growth play on its investigational drug Defibrotide. However, the stock appears reasonably valued after rising ~200% from its 52-week low at $6.96. I believe that the stock could correct ~30% from its recent high at $22.40. This would provide investors an excellent buying opportunity with a favorable risk-reward ratio.
Company Overview
Gentium is a multi-product biopharmaceutical company that develops drugs primarily sourced from DNAs. Defibrotide, Gentium's lead product candidate, has been designed for treatment and prevention of veno-occlusive disease ("VOD"). Defibrotide is derived from porcine mucosal DNA. Phase III clinical trial of Defibrotide is complete as a first-line therapy of severe VOD in the US, Canada, and Israel. The company also completed Phase II/III pediatric trial of Defibrotide in Europe for preventing VOD. Apart from Defibrotide, Gentium produces Sulglicotide, Urokinase and Heparin for commercial distribution.
Gentium: An Excellent Growth Play on Defibrotide
VOD is a disorder of the vascular system that can result from commonly used cancer therapies. In most cases, cancer is treated with chemotherapy, radiation therapy or hormone therapy. In some cases, the therapy treats the cancer directly whereas in other cases, it is administered to prepare the patient for a stem cell transplantation ("SCT") or bone marrow transplantation ("BMT"). The frequency of occurrence of VOD is significant, which ranges from 5% to more than 60% in adults as well as in children.
Gentium recently received a positive opinion for Defitelio, a medicine containing the active substance Defibrotide, by the European Medicines Agency's ("EMA") Committee for Medicinal Products for Human Use ("CHMP"). This process is similar to the FDA's PDUFA meetings that could lead to the drug's final approval and commercialization. If approved, Defitelio would become the first drug for VOD in the current treatment setting.
The EMA's reversal from its earlier negative decision helped Gentium post its best ever quarterly results in June, 2013 for Defibrotide, which is currently available in Europe under the named patient program ("NPP"). I feel that the use of Defibrotide in controlling VOD would be much wider than expected, particularly in severe VOD with high morbidity and mortality rates post stem cell transplantation.
In the US, Defibrotide is available on a pre-approval basis through a cost recovery program and its application is limited to clinical studies and compassionate use. Defibrotide has been granted orphan and fast-track designations by the FDA. In July 2011, a New Drug Application ("NDA") for Defibrotide was filed with the FDA for the treatment of VOD. But after the FDA found many potential "Refuse to File" issues with the candidate, Gentium voluntarily withdrew its NDA in August 2011. Since then, the company has been working hard for resubmitting the NDA and I strongly believe it will be successful in getting the final approval. I will explain in the next section of this article why I believe so. Since there are no approved drugs that can treat or prevent VOD, I expect that the successful commercialization of Defibrotide will unlock significant value for Gentium shareholders.
Defibrotide's Potential
Defibrotide is the sodium salt of a complex mixture of single-stranded oligodeoxyribonucleotides extracted from porcine DNA. It has anti-thrombotic, anti-inflammatory and anti-ischemic properties. In patients suffering from VOD, high levels of various anti-cancer drugs travel to the microvessels of the liver for being filtered out though circulation. This causes extensive damage to the endothelial lining of these vessels. The natural response by the body is to clot the sites of damage, which results in occlusion of these small-diameter vessels and eventually liver failure and multi-organ failure ("MOF"). Defibrotide has protective effects on human microvascular endothelial cells ("HMEC"). It increases the breakdown of blood clots and protects the cells lining the blood vessels. I believe this mechanism of action of Defibrotide will eventually convince the regulatory authorities to approve the drug.
As I explained, severe VOD leads to multi-organ failure, which is characterized by increased oxygen requirement, renal dysfunction and encephalopathy. The prognosis for patients with severe VOD with multi-organ failure is grim, where VOD typically occurs within 30 days of stem cell transplantation, and the survival rate for patients with VOD is 20% or less following 100 days. Several prospective trials were performed to investigate the effectiveness of Prostaglandin E1 ("PGE1"), Antithrombin III ("ATIII") and Ursodeoxycholic Acid as therapeutic measures, which demonstrated no statistically significant results.
Since VOD is difficult to diagnose, prophylactic intervention is always considered. However, a large prospective cohort study to assess the efficacy of a frequently used prophylaxis with low-dose or low-molecular weight heparin demonstrated no significant benefit. The study was conducted by the European Group for Blood and Marrow Transplantation ("EBMT").
The advent of Defibrotide ushered in a new era in controlling VOD, both in terms of therapeutic as well as prophylactic measures. In a retrospective study consisting of 45 pediatric patients, the efficacy of Defibrotide as a therapeutic measure has been tested, which showed that in a subgroup of 22 patients with severe disease, younger age and early start of Defibrotide administration were associated with a significantly superior outcome. In another subgroup of patients who underwent transplantation for malignant infantile osteopetrosis, the incidence rate of VOD was more than 60%. Because of this high incidence, Defibrotide as a prophylactic measure was initiated in 9 patients who underwent transplantation. In this group, only 1 patient (11.1%) was diagnosed with moderate VOD.
Apart from VOD, Defibrotide is also effective in treating Multiple Myeloma, for which Phase I/II dose-escalating, multi center, non comparative and open label trials in combination with melphalan, prednisone, and thalidomide are already completed. The most common side effects of Defibrotide are hemorrhage, hypotension and coagulopathy.
Gentium's Pipeline
Apart from Defibrotide, the company has another compound currently in pre-clinical stages of development. The name of the compound is Oligotide, which is a derivative of Defibrotide. A study by Eissner G et al. showed that Oligotide protects human microvascular endothelial cells against fludarabine-induced activation, damage and allogenicity.
In another study by T. Murohara et al. the efficacy of Oligotide was examined in a feline model of myocardial ischaemia (MI: 90 min) and reperfusion (R: 270 min). Oligotide exerted a significant cardioprotection in MI+R injury.
The studies mentioned above indicate that Gentium will succeed when clinical trials of Oligotide will commence. I believe that Oligotide will have tremendous potential in multiple indications and it will contribute a significant share in Gentium's future revenues.
Gentium: A Stable Value Play Too
While Defibrotide is Gentium's immediate growth driver, it has other products that generate stable revenues for the company. Its Sulglicotide, a sulphated glycopeptide derived from porcine duodenum with ulcer healing and gastrointestinal protective properties, is a popular drug worldwide.
Gentium is a leading producer of Urokinase in Europe. Urokinase is an enzyme derived from human urine. The drug is used in the management of thromboembolic disorders, such as deep venous thrombosis, pulmonary embolism, acute myocardial infarction and peripheral arterial thromboembolism.
The company also produces Heparin Sodium, the sodium salt of sulphated glycosaminoglycan. The source of the substance is swine intestinal mucosa. Heparin has the characteristic property of delaying the clotting of freshly shed blood. Gentium supplies Sulglicotide, Urokinase and Heparin to international pharmaceutical companies that market the drugs in their own countries.
Gentium's Valuation and Projected Stock Price
Gentium is a cash-rich company and I don't think any public offering would be necessary in the near-term. It has cash and equivalents of $21.06 million on its balance sheet as of the quarter ending 30 June, 2013. Given that the company has a steady cash flow, the chance of a cash-crunch is almost zero. Moreover, with a limited chance of share dilution, shareholders' value would be protected.
Gentium is trading at a Price/Book ratio of 9.4x on a book value per share of $2.11. In terms of Price to Book, Gentium is trading at a significant premium relative to its peers, such as Illumina (ILMN), Auxilium Pharmaceuticals (AUXL), Jazz Pharmaceuticals (JAZZ), and Onyx Pharmaceuticals (ONXX). The peer group average Price/Book ratio is 6.3x. I expect that Gentium's book value per share will be around $2.50 in the next six to nine months, following successful commercialization of Defibrotide in Europe. Assigning the peer group average Price/Book ratio on Gentium's forward book value per share, I arrive at $15.75 as Gentium's near-term target price. I believe that would be a good entry point with a 60-70% upside potential from there, running into the FDA's final approval process of Defibrotide and upcoming clinical trials of Oligotide.
I believe Price/Book is one of the best metrics that offers valuable insight to investors seeking growth at a reasonable price. However, I prefer to compare it with ROE, and if there is a significant divergence between the two, I feel something might be wrong.
In case of Gentium, while the Price/Book is rising steadily since the last few weeks, its ROE is not showing significant strength as I expect. Although the ROE is not unimpressive, the fact that it is trending downwards is a bit worrisome. This divergence makes me conclude that the stock needs to be corrected in the short-term. Therefore, I sold my long position in GENT. I am waiting to enter the counter again at a lower level. I still believe GENT is an excellent growth story and expect that the next round of catalysts will come in the form of the FDA's final approval proceedings for Defibrotide and the upcoming clinical trials of Oligotide.
Summary: Reasons to Buy
Defibrotide has been granted Orphan Medicinal Product Designation by the European Commission for the treatment and prevention of VOD. Recently the European Medicines Agency's ("EMA") Committee for Medicinal Products for Human Use ("CHMP") adopted a positive opinion for Defitelio, a medicine containing the active substance Defibrotide.CHMP's positive opinion for Defitelio could lead to the drug's final approval and commercialization in Europe in the near-term. If approved, Defitelio would become the first drug for VOD in the current treatment setting.In the US, Defibrotide has been granted orphan and fast-track designations by the FDA, which has increased the possibility of getting final approval.Gentium's pipeline contains Oligotide, a product with a potential clinical use in pre-SCT conditioning. Oligotide could have significant potential in the treatment of damaged human microvascular endothelial cells ("HMEC").Apart from Defibrotide, Gentium has several other product lines that generate stable revenues for the company, such as Sulglicotide, Urokinase and Heparin.Potential Downsides
Gentium's stock appears reasonably valued at the current price around $20 after rising ~200% from its 52-week low at $6.96. A short-term correction may be just in the cards.If EMA doesn't approve Defitelio in the near-term, the stock may slide towards $10, where it has significant support.It's not clear when the company will resubmit its NDA for Defibrotide to the FDA. The most recently available update regarding this provided no clue. It only mentioned that the company plans to resubmit it this year. Delay in resubmitting the NDA could negatively impact the stock.The Bottom Line
Although Gentium currently has an unfavorable risk-reward ratio for short-term investors, I strongly believe that the stock will eventually cross its all-time high of $22.40. Investors with a long-term horizon are advised to accumulate the stock on dips close to $15.75.
Disclosure: I am long AUXL. 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: I have sold GENT at $21 and will buy again at a lower level.
