Ties With Merck Could Explain Kitov’s Market Interest (NASDAQ:KTOV)

Kitov Pharma Ltd. (KTOV) has recently become one of the most commented stocks on Twitter. The company is a clinical-stage pharmaceutical company having ties with Merck (NYSE:MRK) and venture capital firms, like Arkin Holdings, Orbimed, and Pontifax. I cannot really explain why the market, at this point in time, is that interested in KTOV. The market opportunity is larger than $11 billion. However, the company will need many years to reach the status of FDA approval and it may have to raise capital several times. It could represent a buying opportunity, but as of today, it looks a bit speculative.

Business Model

Kitov Pharma is a clinical-stage business developing treatments for tumor immune evasion as well as drug resistance. The company’s pipeline includes two candidates, NT-219 and CM-24, and FDA-approved treatment Consensi. I believe that the most interesting product candidate is CM-24, which is at Phase 1 of the development. It is also very valuable that Bristol-Myers (NYSE:BMY) is collaborating with the company in the development of CM-24.

Source: Presentation

Market players will most likely appreciate the company because a large amount of data is expected within 15 months. If the results are beneficial, most investors would expect the share price to go up and deliver stock returns.

The Most Promising Product Candidate: CM-24

CM-24 is a monoclonal antibody developed to block CEACAM1, a checkpoint, which contributes to tumor immune evasion. Kitov expects to use CM-24 in a combination with several anti-PD1 inhibitors. The company targets non-small cell lung cancer and pancreatic cancer. Bristol-Myers Squibb Company will collaborate with KTOV in the phase 1/2 clinical trials.

Source: Presentation

The Phase 1 trial, which was conducted by Merck in UCLA and Sheba, assessed safety and tolerability. 27 patients with different conditions received doses from 0.01 mg/kg to 10 mg/kg. The trial shows no discontinuation of study and no drug-related mortalities, so researchers decided to head to Phase 1-2.

Source: Presentation

KTOV’s shareholders most likely already know that the company acquired FameWave in January 2020. The transaction was smart because it gave the company access to the CM-24 asset.

Source: Annual Report

Careful due diligence reveals ties with Merck. FameWave paid a significant amount of money to one of Merck’s subsidiaries, which discovered CM-24. In my view, smart money managers will appreciate that a large conglomerate like Merck was responsible for the discovery. Most readers will not have time to read all the contracts, but let me show a few lines that were included in the annual report:

Source: Annual Report

KTOV financed the acquisition of FameWave with KTOV shares. KTOV also paid FameWave lenders with equity. Financial analysts may not appreciate that the company bought FameWave with shares. Equity dilution is never a great announcement for shareholders. Kitov also issued warrants with an exercise price equal to $1.98 and expiry in four years. Investors have the right to get to know these contracts.

In consideration of the transfer of the FameWave shares to us and the other obligations set forth in the Acquisition Agreement, the aggregate purchase price paid by us for 100% of FameWave shares consisted of the issuance by us to the FameWave Shareholders, and, on behalf of FameWave, to (i) THM, and (ii) the lenders with outstanding balances under the Convertible Loan Agreement, their respective share, as set forth in the allocation table to be provided to us prior to closing of the Transaction, of (A) 8,075,610 of our ADSs (equal to $9,933,000 divided by $1.23, (the “Consideration Shares PPS”)), and such ADSs with aggregate value of $9,933,000 served as the total consideration for 100% of the fully diluted share capital of FameWave, and was allocated among all selling FameWave shareholders, lenders under the Convertible Loan Agreement, THM, and any other persons with equity based rights in FameWave and/or rights to receive consideration from an exit transaction of FameWave or any other type of FameWave reorganization, and Kitov Warrants to purchase 4,037,805 additional ADSs, with an exercise price equal to $1.98 per ADS of Kitov, and with a term of exercise of 4 years beginning on the date of issuance, and subject to other terms and conditions as set forth herein and in the Warrant Agreements, the form of which is attached to the Acquisition Agreement. Source: Annual Report

Interestingly, Arkin Holdings, Orbimed and Pontifax Venture Capital signed an agreement to acquire ADSs at $1.23. The share price is right now at less than $1:

As part of the Acquisition Agreement, three leading life science focused investment funds, Orbimed, Pontifax Venture Capital, and Arkin Holdings, who collectively (together with their respective affiliates) held approximately 90% of FameWave, will invest an aggregate $3.5 million in us in exchange for 2,845,528 newly issued ADSs of the Company, priced at $1.23 per ADS. Source: Annual Report

Investors need to understand well that the research is at a preliminary stage. KTOV will take a significant amount of time to go through Phase 2 and 3, and will need financing. Yes, investors will be able to make money if the FDA approves the treatment, but having a position in the company is a bit speculative. It is also very relevant knowing that a sample of 27 patients does not represent a large number of patients. In Phase 2 and Phase 3, the company will need to test a significant number of patients. In my expertise, the company may need to treat close to 300 to 700 patients to meet the FDA standards.

With that about the number of patients to be treated, the market opportunity is massive. Taking into account only non-small cell lung cancer, we see more than 193,000 new cases per year with a survival rate of only 23%.

Source: Presentation

The global market opportunity for the treatment of global non-small cell lung cancer is close to $11 billion. The market is also growing at a CAGR of 8.5%. KTOV’s market capitalization is equal to $120-160 million. If the FDA and other international organizations approve KTOV’s treatment, revenue would be massive. Let’s assume that KTOV can sell to only 10% of the total market. Note that I am very conservative here. Sales could reach $1 billion. Using a ratio of 4x-5x sales, I would say that the company’s total valuation may touch $4-5 billion.

Source: Drug-dev

The Share Price Will Start To Move A Lot From 2021

KTOV will commence Phase 1-2 in late 2020. It means that we will have to wait, perhaps until 2021, to see the company’s clinical results. It means that the share price can do whatever in 2020 and 2021.

We entered into a joint clinical collaboration agreement, with Bristol Myers Squibb Company (BMY), for a planned Phase 1/2 study of CM-24 in combination with a PD-1 antibody nivolumab (Opdivo®). We expect to initiate that study in late 2020. Source: Annual Report

Normally, the price creeps up when the company officially commences the Phase 1-2. However, large money managers will not shake the market until the results of the study are not revealed. It means that if you are about to buy shares, you need to know that you may have to hold shares for a long time. Until the results are shown, I believe that the share price will move somewhat correlated to the cash per share. In my opinion, the share price will move upwards if the company raises more cash. The more cash the company has, the more likely it is that the company executes R&D and gets its drugs FDA-approved:

Source: YCharts

Cash Available For R&D

In 2019, the company reported financial assets worth $2 million and $4.3 million in cash. If the company can raise $19.4 million, I get a total amount of liquidity of $25-26 million. KTOV does not have a significant amount of liabilities and has no financial debt. The asset/liability ratio equals 4x, so most investors will not care about the company’s obligations. In my view, what matters on this name is whether the company will get its product candidates approved by the FDA or not.

Source: Annual Report

Source: Annual Report

KTOV Reports Sales

In 2018 and 2019, KTOV reported one million in sales. However, investors need to understand that as of today, the company is not profitable. The revenue reported comes from the sale of Consensi, which was approved by the FDA in 2018. However, the company is still trying to figure out how to sell many more products. In my view, investors will need to wait for the approval of the other product candidates to see KTOV making serious money:

Though we have plans for the development of additional therapeutic candidate products, to date, the only revenue we have received has been the initial milestone payments in connection with commercialization agreements for Consensi™. We have not yet demonstrated an ability to successfully sell our FDA-approved drug, Consensi™, which was approved on May 31, 2018. Source: Annual Report

In 2019, KTOV’s most significant expenses were sales, general and administrative expenses worth $6 million and R&D worth $2 million. In total, the loss for the year 2019 was $5.8 million, which is approximately the same figure reported in 2018.

Source: Presentation

With respect to the amount of cash used, in 2019 and 2018, the company reported CFO of -$5.5 million and -$8.4 million, respectively. If I assume cash destruction of -$5.5 million and total liquidity of $25 million, KTOV has sufficient cash to operate for the next 4 to 5 years.

Source: Presentation

Use of proceeds

As mentioned earlier, the company is trying to sell American depositary shares and warrants. In my opinion, if the company can obtain additional financing, KTOV will have resources to continue its R&D activities. As a result, I would expect the market to push up the share price in the long term. With that, perhaps, following the announcement, the share price may decline because of the equity dilution, which I don’t really fear. Remember that this is a growth stock, so more money and more shares sold are always beneficial for the company.

Source: Prospectus

KTOV wants to use the proceeds to finance the development of its drug candidates. Let me mention that I don’t appreciate that the company did not say whether it will need additional financing to complete its R&D activities. Having said that, I do assume that KTOV will need to raise additional capital. Consequently, in the future, more equity dilution could be expected.

We intend to use the net proceeds of this offering to fund the development of our oncology drug candidates, acquisition of new assets and for general working capital purposes. Source: Prospectus

As of the date of this prospectus supplement, we cannot predict with certainty any or all of the particular uses for the net proceeds we received upon the completion of the offering, or the amounts, if any, that we will actually spend on the uses set forth above. Source: Prospectus

My Takeaway

With many traders looking for information about KTOV, clearly some due diligence was necessary. In my view, the company’s research is promising because Merck was involved and large venture capital funds decided to invest. It is interesting that they signed an agreement to buy ADSs at more than $1. The current share price is below that mark. With that, the company only treated 27 patients, so large pharma investors will most likely wait until more people receive treatment. Besides, the company will need a lot more financing to reach Phase 3, and Phase 1-2 will commence in late 2020. To sum up, this is a speculative play, and investors will have to wait for a long time to see the company’s results.

Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in KTOV over 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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