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Interview with CEO of Cellceutix Corporation: Leo Ehrlich

November 15, 2011 | About:
Seth Klarman invests in very interesting biotechs, that probably no one can value to besides him. I found an interesting biotech that has clinical trials coming up with the Dana Farber/Harvard Cancer Center. It is extremely rare for a biotech to have a small biotech that gets to work with Dana Farber. I thought this might be an interesting biotech that could be a potential Seth Klarman type of play. I have interviewed the CEO here where he explains his personal reasons for starting the company and potential upside for the company.

Cellceutix Corporation (CTIX) is an emerging bio-pharmaceutical company developing small molecule therapies for cancer, autism and other diseases. Their lead drug, Kevetrin, an anti-cancer compound, has shown excellent results in preclinical testing of drug-resistant cancers (some of the most difficult of cancers). I believe that this company is exciting enough to present to our readers. Some noteworthy points: Clinical trials are soon planned at Dana Farber/Harvard Cancer Center; the mechanism of action indicates they are activating, p53, the “guardian angel of the human genome”; the inventor of Kevetrin had previously been awarded the highest award at Lilly for his work on two blockbuster cancer drugs and believes this drug is better. Yet, Cellceutix has a market cap of about $40 million, potentially having plenty of upside.

As we promised in our introductory article on Cellceutix Corporation (CTIX) last week, we sat down and spent some time with Cellceutix Chief Executive Officer Leo Ehrlich to find out more about this up-and-coming biotechnology company.

Thank you for taking the time to speak with us, Leo. First off, can you tell us why you decided to form Cellceutix?

Ehrlich: Thank you for having me. My mother had been diagnosed with stage four colon cancer and was receiving chemotherapy and experiencing difficulties due to the toxic treatments. I had already lost my father to cancer. I was discussing her condition with Dr. Krishna Menon, a dear friend of mine and a leading pharmaceutical researcher. I had great respect for Dr. Menon for his role in the development of Alimta and Gemzar, two of Eli Lilly and Company’s multi-billion dollar anti-cancer drugs. When we discussed his anti-cancer compounds in detail, I knew he was gifted in his capacity to understand cancer and its pharmacology. I then decided toinvestmag-glass_10x10.gif my money with him at the helm, to find a better cancer treatment. It was an easy choice to form Cellceutix.

What drugs do you have on your pipeline?

Ehrlich: Our pipeline contains eight unique compounds. Kevetrin is ready to begin clinical trials as a compound to treat solid tumors. We have now turned our focus towards two other lead drug candidates. One is KM-133, an extremely promising drug for the treatment of psoriasis. The active moiety in KM-133 has already received FDA clearance, so we feel strongly that it will be eligible for a 505(b)(2) designation which would put it straight into late-stage clinical trials. We compared KM-133 and methotrexate, a common drug used today to treat psoriasis, and KM-133 clearly outperformed it. On our website,www.cellceutix.com, we have posted the images of mice with psoriasis that were tested. It’s quite astonishing how the psoriasis basically disappeared with our drug. The second compound, KM-391, is being developed as a treatment for the core issues ofautism We have conducted limited pre-clinical research which has provided great results thus far. Treatments for autism are extremely limited and current approved drug therapy only treats symptoms, not the core issues. We are targeting known physiologic conditions of the autistic brain, such as serotonin levels and brain plasticity, and hope to develop a first-in-class therapy.

The FDA has been criticized by some for not approving enough drugs. Does your anti-cancer compound, Kevetrin, have side effects which might prevent the drug from being approved?

Ehrlich: Well, I certainly can’t comment on whether the FDA approves enough drugs or not. I do believe, though, that we may have an advantage because Kevetrin is a totally new class of chemistry in medicine while many other drugs are merely reformulations of other drugs. A brand new entity to fight cancer either alone or as a combination therapy we believe is very desirable. As far as side effects, the profile built through pre-clinical research to date has shown no substantial side effects. Most importantly, Kevetrin has been shown to be non-genotoxic, meaning that it does not damage DNA. While it is impossible to discern if everything will translate to human trials, our toxicology studies give us confidence that there will not be any substantial side effects in clinical trials as well.

Why are you confident about Kevetrin?

Ehrlich: It is because of the p53 pathway. I could go on for quite some time about how important p53 is and how many companies have researched it over the last three decades trying to understand it and find a way to repair damaged or mutated p53 in cancer. It’s aptly dubbed name of “The Guardian Angel of the Human Genome” really says it all as it is a master regulator of cell cycles. Think about it this way: It is well documented that in at least half of all cancers, p53 is mutated or damaged and not performing its duty to regulate the life cycle of a cell; most importantly, not seeing to it that cancer cells are destroyed before they can continue to split and run rampant. We appear to have something that bridges the gap between damaged p53 and the massive amount of cancer patients it affects. Now, obviously, that is the short version. It is much more complex than that as there are different scenarios that define “wild” and “mutant” types of p53 and interactions with other proteins that delineate hundreds, if not thousands, of pathways that companies are researching. But, to the best of our knowledge, no one has collected the type of extremely promising data with their compound that we have. As biotechnology researchers, we – as well as all the other experts that have looked at Kevetrin’s data – have to be chronic cynics. That is what has driven us to test Kevetrin so extensively before heading into clinical trials. The data collected coupled with the responses that we have received from some of the brightest minds in oncology is what keeps our confidence level high at this point.

You announced that your Phase 1 is planned at Dana-Farber/Harvard Cancer Center. It’s unusual for a small cap company, especially for an OTCBB company, to be accepted for a trial there. Why do you believe they agreed to host your first clinical trial?

Ehrlich: The short version to that question is explained in my last answer with regards to a potential major breakthrough in cancer research. I cannot speak as to how many companies wish to sponsor their clinical trials at Dana-Farber, but as one of the world’s leading cancer research centers; I would assume that the number is very high. This allows them to be extremely selective. Believe me, we just went through the process to get approved and it is an arduous task as they are intensive in their research of the compound for a trial. Dana-Farber/Harvard Cancer Center sits at the pinnacle of cancer research and if a breakthrough is going to happen, it would seem logical that they want it to come through their center. They are well-funded and very prestigious. A Principal Investigator there does not want to be associated with a failure. So hosting a trial for any other reason than they like what they see and believe in the potential is the best answer that I can provide.

You have recently mentioned the Rb pathway being affected by Kevetrin. Can you elaborate?

Ehrlich: The retinoblastoma, or Rb, protein is responsible for a major checkpoint in cell growth. Damaged or mutated Rb or p53 is exhibited in nearly 100 percent of all cancers, regardless of origin. We have only discovered Kevetrin’s impact on Rb in recent months, so I can’t comment too much on it until more data is collected. Our research team is continuously conducting more research on Kevetrin’s Mechanism of Action and we now feel strongly that the Rb pathway is a major part of it. People cannot over-simplify defining a Mechanism of Action. Most great inventions begin with a thought that something may work and then the next years are spent defining exactly why it does. Our Chief Scientific Officer, Dr. Krishna Menon, while conducting in-vivo studies at Eli Lilly saw something in Alimta and Gemzar. He helped push for further development of these drugs. For this Lilly awarded him its President’s Recognition Award, Lilly’s most prestigious award. They went on to be multi-billion dollar blockbuster cancer drugs. In Dr. Menon’s development of Kevetrin as a potential anti-cancer drug, it is showing even greater results in tumor suppression. Then the p53 connection was confirmed. Now they are seeing connections to the Rb pathway, but more research is needed for documentation. The fact is that these are the two most powerful proteins in the body related to stopping tumor progression and Kevetrin seems to be impacting both. We have to leave it at that for the moment.

What other major drugs are you bullish about?

Ehrlich: I don’t want to be put on the spot on other companies’ compounds. However, I will say I am more excited about Kevetrin’s anti-cancer potential than any other compound out there. That includes compounds being touted by big pharma.

When do you think the company will be Free Cash Flow (FCF) positive?

Ehrlich: The business model is to advance the compounds as far along in the clinical trial process before engaging in a deal with big pharma. The value of the compound goes up exponentially the further along it is in the trial process. A compound which has completed Phase 1 is much more valuable than a compound that has not yet started the trials. The same is true for Phase 2 and 3. If even a portion of our preclinical results are confirmed or replicated in the Phase 1, I would have to believe the compound is worth in the many hundreds of millions of dollars, which will really perk the interest of many of the big pharma that have already contacted us. To say when we will be FCF positive ultimately depends on licensing or partnering agreements that could come as results from the clinical trials from Kevetrin and other potential deals with our other compounds.

Should investors be concerned about the balance sheet?

Ehrlich: I think that with any developmental company, the balance sheet is almost always a concern at first. Most of the debt on the balance sheet is owed to me, Dr. Menon, and Kard Scientific, a company Dr. Menon’s family controls. I have invested over $2 million of my own money. We have just raised $666,000 to cover the beginning of the clinical trials. We have estimated the Phase 1 to cost approximately $2.5 million over the course of one year or so. We know that we will have to raise more capital and have many leads to continue to raise the remaining required funds, including possibly some more funding from Cellceutix’s officers. Our funding process to date shows our commitment to shareholder value and we will continue to hold that in the highest regard moving forward with generating funds.

What valuation would you put on the company?

Ehrlich: The valuation of any company is a reflection of potential future sales. As such, clinical trials will truly help us define where we stand. There is countless biotechnology companies listed on all the exchanges that do not have a product on the market that carry valuations that far, far exceed ours. The caveat is that many of those biotechs are targeting very specific diseases which, although the market potential can still be large, does not compare with the magnitude of the impact that our drug Kevetrin could have on the cancer industry. Apparently as a result of our potential and target patients, investors have made comparisons to companies such as Pharmassets, Inc. (VRUS) and Medivation, Inc. (MDVN) [Interviewers' NOTE: Market caps: Pharmassets $5.1 billion, Medivation $1.4 billion, Cellceutix $40 million] because of the possible impact of their drugs on the Hepatitis C and prostate cancer industries, respectively, even though neither have FDA approval yet. In all fairness to them, both are a couple years ahead of us in development, showing strong clinical data and have cash on their balance sheet. But, in all fairness to us, neither VRUS nor MDVN has ever had a share value as low as ours and our target market is significantly larger. By no means would I draw a comparison today to either, but it certainly does demonstrate the potential upside as to where we could be should clinical trials validate our contentions.

Thank you for your time, Mr. Ehrlich. I look forward to following along with your developments and speaking with you again.

Ehrlich: Thank you as well.

The 52-week high for CTIX is $1.01, which was hit in May as the stock price was trending above $0.80. Since it reached that price, there has been no significant change in capital structure and a host of positive corporate developments have been disclosed. In the past six months, another major Mechanism of Action for Kevetrin has been discussed; the company has filed the Investigational New Drug (IND) application for Kevetrin with the FDA, and announced that the planned clinical trials will be held at Dana-Farber and Beth Israel Deaconess Medical Center. Shares of CTIX closed on Friday at $0.46. Given the corporate developments and planned clinical trials, those old highs may soon be seen again.

Disclosure: No position

About the author:

Jacob Wolinsky
My investment ideas have been inspired by many of value investors including Benjamin Graham, Charles Royce, John Neff, Joel Greenblatt, Peter Lynch, Seth Klarman,Martin Whitman and Bruce Greenwald. .I live with my wife and daughter in Monsey, NY. I can be contacted jacobwolinsky(AT)gmail.com and my blog is www.valuewalk.com

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