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Endocyte (ECYT)

Today we have an extended recommendation from 100% Letter Editor Tyler Laundon. This high-potential but speculative Nasdaq-listed stock is appropriate for aggressive investors.

Endocyte (ECYT)

Today we’re going to hitch a ride on one of the most exciting and high-potential biotech stocks in the market.

Endocyte (ECYT) is a $560 million market cap...

Today we have an extended recommendation from 100% Letter Editor Tyler Laundon. This high-potential but speculative Nasdaq-listed stock is appropriate for aggressive investors.

Endocyte (ECYT)

Today we’re going to hitch a ride on one of the most exciting and high-potential biotech stocks in the market.

Endocyte (ECYT) is a $560 million market cap biopharmaceutical company that is developing targeted therapies to treat cancer and inflammatory diseases. The most promising treatments Endocyte is working on serve large markets, including patients with ovarian cancer, lung cancer and prostate cancer.

The company fits the mold of a biotech company that has “double” potential. It has cash, a world-class partner and a solid drug development pipeline. It also has near and mid-term catalysts that should move the stock steadily higher from today’s price of $15.57.

Endocyte is not some fly-by-night operation or some pump-and-dump speculative biotech stock. It is a legitimate operation that is working with Purdue and Duke Universities to develop targeted therapies to treat some of the most deadly types of cancer.

But perhaps the best sign of Endocyte’s legitimacy and potential — especially to those not well versed in the language of biotech stocks — is its $1 billion partnership with Merck (MRK) to develop a super-targeted cancer treatment.

Merck is a $140 billion multi-national drug manufacturer that generates $45 billion in revenues each year. Its decision to sign on with Endocyte in April 2012 to develop cancer treatments is a great endorsement of Endocyte’s potential.

This all said, I want to be absolutely clear. An investment in Endocyte carries significant risks. The company does not yet generate product revenues. Its lead product (that its developing with Merck) has around a 70% chance of being approved by European authorities in the next year, and around a 65% chance of approval in the U.S. The chances are good, but there are no guarantees here.

But the potential rewards far outweigh the risks. And all things considered, a 70%-ish chance of a near-term new product launch to treat extremely fatal forms of cancer is pretty darn good. Merck certainly things so, that’s why they’ve put $1 billion on the line. Let’s talk about this deal.

In April 2012 Endocyte signed a deal with Merck to develop and sell its primary cancer drug, Vintafolide. Endocyte received $120 million up front and is eligible to receive $880 million more in milestone payments as Vintafolide makes its way through stages of development and eventual (hopefully) commercialization.

If the team is successful in gaining approval for Vintafolide, Endocyte will split U.S. sales of the product 50/50 with Merck, and it will receive a double-digit royalty on sales around the rest of the world. Additionally, Endocyte will be reimbursed some costs associated with certain Vintafolide trials that are currently ongoing.

This is a big deal on a number of levels. First, it legitimizes Vintafolide’s potential in the marketplace. Certainly successful trials to date already help with this, but when a company like Merck jumps, investors, who are not doctors or biochemists, can invest with a bit more confidence.

Second, it gives Endocyte a lot of financial flexibility. It’s already recording around $15 million in revenues per quarter because of the deal. And over the coming year it should record a lot more as more milestones are hit. Merck’s financial and marketing support will help this product sell around the world.

And third, the deal helps Endocyte progress its other developmental drugs, which it has retained 100% ownership of. More products moving through the pipeline more quickly (assuming they are effective) is a good thing. I should also note that Endocyte becomes a more likely takeover candidate because of the deal too.

The company has $170 million in cash and cash equivalents (equal to 30% of its market cap) and burns cash at a rate of roughly $15 million a quarter. It’s very well funded for a company of its size as a result of the Merck deal.

There are three primary catalysts I’m watching that should add considerable value to shares of Endocyte. ...

Catalyst #1: Vintafolide Could Be Approved To Treat Ovarian Cancer In Europe Before The End of 2013

The standard treatment for ovarian cancer is to use a platinum-based chemotherapy. But some types of ovarian cancer are resistant to platinum, and patients with this form tend to have a lower life expectancy.

Around 80% of platinum-resistant ovarian cancer patients are good candidates for Endocyte’s Vintafolide drug. And this 80% can be determined by using Endocyte’s wholly owned imaging diagnostic, Etarfolatide.

Right now, both Vintafolide and Etarfolatide are in Phase III trials in Europe, and Endocyte and Merck have submitted an application for early approval of the drug. European authorities are expected to make a recommendation in December of 2013. That means the drug could go on sale in Europe in 2014, if all goes well.

To be clear, the chances of early approval are probably not much more than 50%, so this is anything but a sure thing. However, it is more than likely the drug will be approved — it just might not be early.

In previous trials the treatments have appeared effective, so both Merck and Endocyte are preparing to launch in Europe in 2014. This is a good sign.

This would be a huge step forward for Endocyte and would speak volumes about the efficacy of the drug for treating other forms of cancer, like lung, breast and prostate cancer. It would also mean product revenues in 2014.

Catalyst #2: Ovarian Cancer Trial in U.S. Could Be Expanded, Meaning Greater Chance of Approval

Endocyte and Merck are also seeking approval for Vintafolide to treat ovarian cancer in the United States. This trial is called PROCEED, and Endocyte says it will have enough data in the first half of 2014 to make a decision about expanding the trial.

The idea here is that a greater sample size significantly improves the reliability of the data. More reliable date would help pave the way for approval by U.S. regulators. And of course, approval in the U.S. as well as Europe significantly expands the market opportunity.

I don’t have a specific date for Endocyte’s decision on expanding this trial. But I know they want to do it, and with the financial support of Merck the team has the cash. Expansion of this trial will be viewed as a very good sign by the market and should make shares move higher.

Catalyst #3: Phase II Trial Results For Treatment of Lung Cancer Are Expected In Early 2014

There are a lot of patients suffering from lung cancer that could use Vintafolide. Endocyte states that the market opportunity here is huge, even bigger than the market opportunity to treat platinum-resistant ovarian cancer.

The Phase II trial to treat lung cancer with Vintafolide is called TARGET, and this trial is now completely full, with 180 patients participating. Data should be available in the first quarter of 2014, and if things go well shares of Endocyte should pop. ...

Endocyte is a small company, but it’s doing all of the right things to get its cancer treatments through development and into the marketplace. And over the next couple of months the pace of development will pick up considerably. That’s why I want to get on board now.

Any risk-adjusted estimate of revenue potential here is fraught with the pitfalls of too many assumptions. But let’s assume that Vintafolide is approved in Europe in early 2014 and in the U.S. in mid 2014. And let’s add in milestone payments from Merck based on these assumptions. That means Endocyte could generate $100 million, or more, in revenue in 2014.

The combination of product revenues and drug approvals would more than likely send shares of Endocyte soaring to $30 and above. As I’ve stressed, there are certainly no guarantees here. And this stock could be cut in half if Vintafolide isn’t approved.

But based on my research, the positive progress in trials to date, and the financial and marketing support of Merck, I think this is an opportunity we want to jump on. As always, I’ll be initiating a first tranche at today’s price and holding off for a second tranche at a later date.

Action to Take: Buy Endocyte (NASDAQ: ECYT) around $15.57 a share.

Tyler Laundon, The 100% Letter,, 866-447-8625, August 21, 2013