Deciphera Pharmaceuticals: Updates To Thesis, Expecting A Rebound Ahead Of August PDUFA (NASDAQ:DCPH)

Shares of Deciphera Pharmaceuticals (DCPH) have risen by 20% since my August 2019 update called the stock a Buy based on ripretinib’s impressive showing in fourth-line and fourth-line plus gastrointestinal stromal tumors (GIST). Targeted oncology has been one of my favored themes to capitalize on in the past and it seemed that expansion potential of this lead drug candidate compounded with potential of pipeline assets was indicative of significant undervaluation.

As the share price took a hit to start 2020 and the company has a key regulatory date approaching in Q3, I feel that the present is an ideal time to revisit and update readers on this multi-faceted story.

Chart

Figure 1: DCPH daily advanced chart (Source: Finviz)

When looking at charts, clarity often comes from taking a look at distinct time frames in order to determine important technical levels to get a feel for what’s going on. In the above chart (daily advanced), we can see shares gapped up in August after positive topline results from the INVICTUS phase 3 trial were released. From there, share price ran up to the $70 level before February’s gap down on news of a secondary offering. Shares formed a bottom in the mid-$30s and now appear poised to regain some ground.

Overview

In my August 28th update, I touched on the following aspects of our bullish thesis:

  • Leadership lineup appeared quite deep with key members of management hailing from the likes of Pfizer (NYSE:PFE), Amgen (NASDAQ:AMGN), Roche (OTCQX:RHHBY), Shire (OTCPK:SHPGF) (SHPG), Merck (MRK), GlaxoSmithKline (GSK). This included Chief Commercial Officer Daniel Martin (Senior VP at Heron Therapeutics (NASDAQ:HRTX)) and Stephen Ruddy (prior VP of Pharmaceutical Development at Tesaro (NASDAQ:TSRO)). I also was pleased with signs of institutional clustering (New Leaf Ventures, OrbiMed Advisors, Opaleye Management, etc.).
  • DCC-2618 (ripretinib) was an asset of interest and the subject of several trials, including phase 3 INVICTUS study in advanced GIST tumors where phase 1 data had shown durable disease control in heavily pretreated patients). The company was clearly a winner at the previous ASCO where updated phase 1 data showed ORR of 24% and 3-month DCR of 80% in 2nd and 3rd line settings (easily besting results from currently approved therapies, where ORR is in the mid-single-digits and DCR ranges between 50% and 63%). Also of interest, mutational profiling data demonstrated a range of KIT mutations in GIST and the ability of the drug candidate to reduce MAF (mutant allele frequency) by over 50%. INVICTUS phase 3 study in 4L & 4L+ GIST clearly aced its endpoints, showing significant benefit in PFS (6.3 months versus 1 month for placebo arm) and magnitude of benefit in overall survival (15.1 months versus 6.6 months for placebo arm). Risk of disease progression or death was reduced by 85% (HR of 0.15, p<0.0001) compared to placebo. Safety profile seemed decent as well, with 49% Grade or 4 treatment-emergent adverse events comparing favorably to 44% on placebo arm.
  • Market opportunity was quite sizable as compared to valuation at the time, another clue that good things were in store. To be fair, competition from Blueprint Medicines (BPMC) was a factor we took into consideration, especially in certain spaces such as systemic mastocytosis where this competitor’s data shined. Agreement with Zai Lab (ZLAB) to commercialize ripretinib in Greater China Area ($20 million upfront cash payment, up to $185 million in potential milestone payments plus royalties in low to high teens) opened up another opportunity as well.

Figure 2: Estimated market opportunity broken down (Source: corporate presentation)

  • Pipeline was another factor that made this one appealing, as management pointed out that combination data for CSF1R inhibitor DCC-3014 was of interest, considering its selectivity (100 to 1000 fold) and potential advantages in terms of tolerability. The strategy here was to be a fast follower to big pharmaceutical firms such as Bristol-Myers Squibb (NYSE:BMY) and Roche as they accelerated investments in this space and unveiled data sets. For 3014, the idea was to eventually find an I-O partner, given complexities of larger scale combination trials.

Figure 3: Pipeline (Source: corporate presentation)

Let’s move on to my favorite part, material events that we can look forward to in 2020.

“Needle Moving” Catalysts

For ripretinib, key regulatory catalyst is the PDUFA date of August 13th to hopefully gain approval for 4L/4L+ GIST. Launch will follow, as will submission of Marketing Authorization Application to the European Medicines Agency. My personal opinion is that with valuation depressed, Deciphera becomes even more of an M&A target as it would make for a logical bolt-on acquisition. Ripretinib phase 3 INTRIGUE study in 2nd line GIST will complete enrollment this year as well, and phase 1 study expansion data will be presented. As for prospects in the second line GIST setting, consider that phase 1 data showed median PFS of 10.7 months and 19% confirmed objective response rate (compares favorably to 5.6 month median PFS for sunitinib with objective response rate of 6.8%). The company estimates 2,000 incident patients eligible for second-line treatment in the US.

While of lesser importance, we can also look forward to phase 1 data for DCC-3014 in tenosynovial giant cell tumor patients and selection of a phase 2 dose to move forward into the expansion portion of the study. This is a rare disease indication with an estimated annual incidence of the localized form of 13,000 and approximately 1,300 for the diffuse-type of the disease in the U.S. Initial data here has been quite encouraging as well (at first assessment 3 patients showed tumor reductions from baseline of 48%, 25% and 24%). As of cycle 10, one patient had confirmed PR with tumor reduction of 84%.

For rebastinib, they will be selecting a phase 2 dose and activating the second part of the phase 1/2 study in combination with carboplatin. Phase 1b/2 data for this combination as well as paclitaxel combination could prove of interest.

Lastly, for DCC-3116 IND will be submitted (mid-2020) to the FDA to move forward with clinical stories. This asset inhibits cancer autophagy via inhibition of ULK kinase. IND filings are expected in mid-2020, and here, there is potential to treat mutant RAS cancers in combination with inhibitors of downstream RAS effector targets, including RAF, MEK, or ERK inhibitors as well as with direct inhibitors of mutant RAS).

Figure 4: Preclinical data for DCC-3116 shows potent inhibition of ULK in multiple RAS cancer cell lines (Source: corporate presentation)

Figure 5: DCC-3116 + MEK inhibitors show reduced tumor growth in KRAS in vivo cancer models (Source: corporate presentation)

Normally, I wouldn’t give much attention to assets in preclinical stage, but we’ve already observed the increase in valuations in certain companies as a result of KRAS hype (such as Mirati Therapeutics (NASDAQ:MRTX)).

Other Information

For the fourth quarter of 2019, the company reported cash and equivalents of $579.6 million with operational runway into 2H 2022. Research and development expenses rose significantly to $46.6 million, while SG&A rose to $23.7 million. Net loss more than doubled to $67.2 million.

As for institutional investors of note, RedMile Group holds a 9.2% stake. Other holders include New Leaf Ventures and OrbiMed Advisors with a small position. However, history of insider sales does not particularly inspire confidence.

Perhaps part of the reason for pressure on shares this year has been the approval of Blueprint Medicines’ (BPMC) Aykavit for the treatment of adults with unresectable or metastatic GIST harboring a platelet-derived growth factor receptor alpha (PDGFRA) exon 18 mutation, including PDGFRA D842V mutations. In January, the updated National Comprehensive Cancer Network Treatment Guidelines for Soft Tissue Sarcoma added Aykavit as a recommendation in 4L GIST patients who have progressed following treatment with imatinib, sunitinib and regorafenib. Aykavit has its PDUFA date for 4th line GIST in mid-May.

Final Thoughts

To conclude, it does appear that regulatory and clinical catalysts for lead drug candidate ripretinib should be sufficient to help turn shares around, assuming positive outcome for these events. Ripretinib remains a potential best-in-class treatment for advanced GIST with impressive improvement in overall survival observed (the gold standard endpoint as far as I’m concerned), not to mention significantly improved PFS. Fourth line setting provides an efficient pathway to market, with 2nd line GIST to hopefully follow and from there looking into front-line and combination strategies. Other assets in the pipeline offer significant optionality, including DCC-316 in RAS mutant cancer. Lastly, as discussed prior, the possibility of a quick takeout by big pharmaceutical companies should not be discounted (75% premium would equate to $4.2 billion market capitalization or so).

For readers who are interested in the story and have done their due diligence, Deciphera Pharmaceuticals is a Buy. I suggest initiating pilot position and patiently accumulating shares ahead of the regulatory catalyst. Additionally, this one might be more appropriate for investors with medium to long term time frame.

Risks include disappointing regulatory decision, negative trial data in 2nd line GIST, setbacks in the clinic with other assets and substantial competition in GIST (as well as certain other indications).

As for downside cushion and elements of derisking (key traits we look for in ROTY ideas), it would appear that definitive data from the INVICTUS study plus promising phase 1 results in other indications provide substantial evidence of the potential and promise of ripretinib in carving out its niche in GIST market.

Author’s Note: I greatly appreciate you taking the time to read my work and hope you found it useful. Consider clicking “Follow” next to my name to receive future updates and look forward to your thoughts in the Comments section below.

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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.

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