Cellectar Biosciences (Nasdaq: CLRB) was a topical name last week, announcing a financing, additional data from their Waldenstrom’s macroglobulinemia (WM) pivotal study, and hosting a KOL call. Unfortunately, the company underwhelmed investors on all fronts. The financing, although it had been telegraphed, was punitively dilutive. The updated WM data, although still strong, were not dramatically better, as the CEO had guided they would be, than January’s interim data. Cellectar has poorly managed investor expectations, and the stock reflects investor frustration. Yet, despite Cellectar’s mismanagement of expectations, we still think Cellectar is a name investors should have on their radar, especially once it is on the PDUFA clock.
Reasons For Frustration
Cellectar needed more cash in a tough biotech market. The company’s only leverage in a finance negotiation was an impending catalyst—the updated top-line data from their pivotal WM study, which the CEO guided would be substantially better than January’s interim results. The problem was that the updated 55-patient data set was not better than the 41-patient interim data released in January.
Source: https://www.oncologypipeline.com/apexonco/node/742
In our opinion, last week’s data are still very good. CLR 131 should have a good probability of approval next year. Nonetheless, the CEO overpromised and underdelivered on the results, which put all the leverage in a finance negotiation with the investors. The outcome was another tranched financing, where the investors from the September 2023 deal agreed to re-price the final tranche of warrants from $4.7775 to $2.52 and immediately exercise for proceeds of $19mm to Cellectar. The investors, for “generously” agreeing to re-price their $4.7775 warrants, were given three additional warrants, one struck at $2.52 that can be force exercised upon FDA accepting Cellectar’s NDA for CLR 131, another struck at $4.00 that can be force exercised upon FDA approval for CLR 131, and a final warrant struck at $5.50 that can be force exercised upon CLR 131 achieving quarterly revenue of $10mm or more. Cellectar will bring in an additional $73.3mm if all the 19mm+ new warrants are exercised. This deal reflected Cellectar’s poor negotiating position, caused by mismanaging timelines and investor expectations, a deal that undoubtedly will weigh on the stock for the foreseeable future.
Reasons For Caution
We are cautious about how Cellectar’s equity will perform between now and the company receiving a PDUFA, triggering the first tranche of warrants. The company has guided it will submit its NDA in 4Q2024, which means an FDA acceptance is likely a 1Q2025 event. Between now and then, the company should have some incremental catalysts, including the full data set from the WM pivotal study at the American Society of Hematology (ASH) in December and potentially some early data from CLR 131 in pediatric gliomas. It’s reasonable to expect the stock could experience a modest recovery off these impending catalysts. Still, it’s difficult to imagine the stock having a big move with 6mm+ warrants at $2.52 to be exercised within the next 6 months.
That leads us to another near-term concern: damage to the company’s retail shareholder base. Cellectar was a popular name amongst many of the vocal and well-followed biotech influencers on X. It continues to have its champions, but several notable people have left the room.
Jason Napodano’s (JNap) piece on Cellectar is excellent, and we highly recommend reading it. We share his frustration and concern about the impact of the tranched financing, but less so this data concerns. Nonetheless, for the time being, Cellectar has alienated some of its retail shareholder base and social media champions, an audience that will be critically important if the stock is to make a meaningful recovery.
Reasons For Optimism
Assuming FDA accepts Cellectar’s NDA, the company should have a PDUFA late in 2Q2025 (they have guided they expect a 6-month review). Investors must weigh the probability of approval with the impact of the next tranche of warrants (8.2mm struck at $4.00) that can be force exercised upon FDA approval. Based on the WM data Cellectar has reported, we believe they have a good chance at approval. Last week’s data may have underwhelmed, but that is more a function of poorly managing investor expectations, as opposed to the quality of the data. The company has work to do before investors can start the PDUFA countdown, but optimism should creep back into the name once they are on the clock toward an FDA approval decision.
Regarding the warrants, investors should look at Delcath Systems (Nasdaq: DCTH) as a reference for how Cellectar may trade around a PDUFA catalyst. In March 2023, Delcath entered a tranched financing agreement that included $35mm upfront ($3.30/share) and two warrants, one struck at $4.50 that could be force exercised upon FDA approval and a second struck at $6.00 that could be force exercised upon achieving $10mm in quarterly commercial sales (sound familiar….). The chart below illustrates that the stock began gathering momentum months before its August 14th, 2023 PDUFA.
But look what happened a month before their PDUFA. Is it a coincidence that the stock traded down to the original financing price of $3.30 in the days before the PDUFA? Who had the greatest incentive to sell before the PDUFA? Investors holding a $4.50 warrant who got a risk-free look at the PDUFA outcome. It’s perfectly rational behavior; the funds that participated in the deal at $3.30 locked in gains before a risky regulatory event, knowing they have a warrant that allows them to participate in the upside of an approval while avoiding the downside of a complete response letter (CRL).
Delcath did get FDA approval, but the pain of the tranched deal wasn’t over. As the chart shows, the force exercise period was both a blessing and a curse. A blessing because it quickly refueled the company’s balance sheet, but a curse in that certain tranche investors quickly locked in profits (again), traded out of their $4.50 warrants/stock, and killed the momentum.
As stated above, we like the probability of approval for CLR 131, but a CRL could be catastrophic. Is the upside from approval, knowing there is a warrant overhang, enough for holding a position through a risky regulatory event? The Delcath chart around their PDUFA would suggest that investors are better off copying the playbook of the funds who participated in the deal – trade around the event. The forced exercise period after approval will likely keep the stock range-bound (worth highlighting that Delcath’s force exercise period was 30 days and Cellectar’s is 10 days). Furthermore, it’s not uncommon for small companies to have a post-approval hangover, as they can’t spend aggressively on commercial “at-risk” before approval, often leading to a slow or delayed commercial launch. The combination of the warrant exercising and slow commercial launch will likely allow investors who believe in the longer-term prospects for Cellectar an opportunity to build a position post-approval without having to take PDUFA risk.
Speaking of Delcath
While on the topic of Delcath, they are scheduled to report their Q2 earnings next Monday, August 5th. The current street estimates are for quarterly revenues slightly over $5mm. The most recent analyst initiations, Stephens (May initiation $25 target) and Craig Hallum (June initiation $18 target), have Q2 revenues pegged at $5.4mm and $5.6mm, respectively. We assume Delcath’s CEO, Gerard Michel, would have stickhandled those new analysts to those targets, so we believe revenues should exceed the consensus estimates. The stock has performed well of late, raising the question of whether investor expectations align with sell-side expectations? We would highlight a recent note published by Guy Judkowski (guyjud on X) who describes a path to $7mm in Q2 sales driven by Moffitt Cancer Center’s heavy use combined with smaller contributions from new sites ramping up their use of HEPZATO.
Subsequent to Judkowski’s note, another article came out, this time describing UCLA Santa Monica’s experience with their first four HEPZATO procedures.
The articles are highly encouraging, especially considering Delcath is still in the early innings of the U.S. launch of HEPZATO. Although the quarterly numbers matter, investors should also pay close attention to CEO Michel’s tone. He tends to be relatively transparent (we used to complain that he was too transparent) in his remarks, so we look forward to analyzing the qualitative components of the call as much as the quantitative ones.