Differentiated assets drive value creation
Athenex has two oncology assets in clinical stages: an oral chemotherapeutic platform and a Src kinase inhibitor pipeline. The primary value driver, Oraxol, which comes from the chemo platform, is likely to offer a better efficacy/safety profile vs. injectable paclitaxel, with phase 3 data expected in 2018. We believe the company's oral chemo platform is relatively low risk as these chemo agents have already been approved and only the delivery mechanism will be improved. Within the management team, there are four ex-CEOs from listed companies who have strong experience in drug development and capital markets. We initiate coverage with a Buy rating and a price target of USD20.0.
Oraxol may offer better efficacy/safety profile than IV paclitaxel
The most advanced compound from its oral chemotherapeutic pipeline is Oraxol, with a target product profile that includes higher response rates, less neuropathy and lack of hypersensitivity reaction vs. IV paclitaxel. If the phase 3 study does confirm a better efficacy/safety profile, Oraxol should differentiate itself from existing drugs such as Abraxane (albumin-bound paclitaxel) and IV paclitaxel. We believe opportunities in China could be significant for Oraxol if the target profile can be delivered, as the paclitaxel market in China is approximately USD470m, vs. USD680m in the US in 2016. We model risk-adjusted global peak sales of USD2.1bn for Oraxol in 2027. We expect FDA feedback on interim data in the near term to be a key catalyst for the stock.
Src kinase inhibitors address an unmet medical need
The key drug on the Src kinase inhibitor platform, KX-01, is in a phase 2 study for actinic keratosis (a pre-cancer condition). Management expects similar efficacy but a better safety profile vs the currently available therapeutics such as 5-FU, which is cytotoxic. With orphan drug designation by the FDA, KX-02 is in a phase 1 study in the US for GBM (glioblastoma), and just recently received CFDA approval to start a phase 1 study in China. We believe the phase 2 data release and the start of the P3 study for KX-01 should be important near-term catalysts.
Initiating with a price target of USD20.0; risks
Our price target is based on a probability-adjusted DCF approach with 11.0% WACC. We forecast free cash flow for the company until 2028 based on our risk-adjusted revenue forecasts for pipeline candidates including Oraxol, Oratecan, Oradoxel, Oratopo, KX-01, and KX-02. Key downside risks include the failure of clinical studies, regulatory setbacks, slower-than-expected ramp-up of commercialization, and further dilution from potential equity financing as the company will remain loss-making until 2022.