Kalytera Therapeutics Investors Should Expect Severe Stock-Price Volatility

Potential catalysts for shares of Kalytera Therapeutics, Inc. (TSXV:KALY) include key milestones, such as the success of the Phase 2 trials and initiation of Phase 3 trials

SmallCapPower | December 14, 2017: Kalytera Therapeutics, Inc. (TSXV:KALY) is a pharmaceutical company focused on developing innovative cannabinoid therapeutics. In 1Q17, Kalytera Therapeutics transitioned from a pre-clinical stage company to a clinical-stage company with the acquisition of Israel-based Talent Biotechs and its portfolio of CBD product candidates, including a Phase 2 GVHD (graft versus host disease) candidate and several pre-clinical CBD prodrug candidates. Kalytera Therapeutics is currently focused on advancing the GVDH program with expected approval by 2020.

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Unlike several cannabis producers in Canada that generate revenues by selling THC and CBD strains to registered patients in Canada, Kalytera Therapeutics can only generate revenues if its lead product gets approval for GVDH or if it can license its CBD prodrugs to other drug development companies. The Company trades at a meager $32 million market cap, and most of this has come in the last few weeks on announcements related to the patents and expected Phase 2 trials. The stock fell 20% recently post the announcement of Phase 2 clinical trials commencement, which indicates the stock already reflects all near-term positives.

Typical with clinical-stage companies, share price movements in Kalytera Therapeutics will depend on key milestones such as the success of the Phase 2 trials, initiation of Phase 3 trials, amongst others. Drug development is a capital and time intensive process and the approval is never guaranteed. Hence cannabis-sector investors might want to focus instead on producers such as Canopy Growth (TSX:WEED), Aphria (TSX:APH), and Aurora Cannabis (TSX:ACB), which are growing at a rapid pace with further acceleration expected once the recreational market opens up in mid-2018.

Investment thesis

• Clinical-stage company focused on developing innovative cannabinoid therapeutics
• Commencement of Phase 2 trails for prevention of GVHD
• Capability to fund GVHD program remains a key risk

Focused on developing next generation of cannabinoid therapeutics

Kalytera Therapeutics is focused on developing innovative cannabinoid therapeutics for a range of unmet medical needs. Leveraging proven management team that includes people with vast drug development experience, the Company specializes in developing product candidates in cannabidiol (CBD) therapeutics, proprietary CBD prodrugs, and cannabinoid-like and endocannabinoid-like compounds. Kalytera Therapeutics is initially focused on CBD therapeutics and CBD prodrugs – its lead CBD product candidate for graft versus host disease (GVHD) has bagged two patents and its prodrugs program has several preclinical candidates.

Kalytera’s development portfolio

Lead clinical-stage program in Phase 2 study for GVHD

With the acquisition of Talent Biotechs of Israel in 1Q17, Kalytera Therapeutics transitioned from a pre-clinical stage company to a clinical-stage company. Talent completed four Phase 2 (a) clinical studies on 48 patients in the prevention of GVHD and reported positive results that showed significant reductions in GVHD vs historical controls and not a single  patient developing GVHD while on CBD treatment. On December 7, 2017, the Company announced the initiation of a Phase 2 clinical study in the prevention of GVHD and agreement with The Salzman Group of Israel to manage and partially fund the study. Designed to assess the pharmacokinetic and safety profile of multiple doses of CBD for the prevention of GVHD, the study will enroll 36 patients following allogeneic hematopoietic cell transplantation, and will take place at Beilinson Hospital, and one other major medical center in Israel. Results of the study are expected by Q3 2018.

Last month, the program received a second U.S. patent for prevention and treatment of graft versus host disease, validating the technology and positioning the Company to move forward to obtain FDA approval of CBD in the prevention of GVHD. Kalytera Therapeutics strategy for advancing the development of the GVHD program involves two stages – prevention of GVHD and Treatment of GVHD. For the prevention of GVHD, the current Phase 2b is expected to be complete in H2 2018, followed by a pivotal Phase 3 study starting H2 2018. With Orphan Drug Designations (ODD) granted in the U.S. and Europe, Kalytera Therapeutics anticipates fast-track approval of the product by year-end 2020. The treatment program will start in H2 2018.

GVHD – a large unmet medical need

GVHD, an orphan disease, is a multisystem disorder that is a common, life-threatening complication of hematopoietic stem cell transplant procedures and occurs when the transplanted donor cells attack the patient’s organs, including the skin, gastrointestinal tract, liver, lungs and eyes. GVHD is associated with acute and chronic illness, infections, disability, reduced quality of life and death. The current standard of care for prevention and treatment of GVHD includes generic immuno-suppressants, such as Cyclosporine and Methotrexate, which show limited efficacy.

Bone-marrow transplantations performed annually in the six major markets is increasing – with GVHD seen in 50% of patents. With no approved treatment for either prevention or treatment of acute GVHD and the cases increasing, the addressable market is quite large with projections of $407 million (generic immuno-suppressants/no approved drug) in 2018.

Capability to fund GVHD program remains a key risk

Kalytera Therapeutics has limited cash on its books and the success and progress of the Phase 2 study will depend on its ability to raise sufficient funding primarily through equity/convertible debt, since the Company is long way from generating any revenues to repay pure debt. Either ways, there will be significant dilution for existing shareholders.

Until the third quarter 2017, the Company’s operations were run primarily from the $15 million ($10 million paid for Talent acquisition itself) private placement financing in Canada in February 2017. At September 30, 2017, the Company’s cash and cash equivalents decreased to a meager $55,000. Hence on November 22, 2017, Kalytera Therapeutics announced a $5 million private placement of convertible debenture units bearing 9% interest payable semi-annually. The proceeds from the offering, expected to close in mid-December, will be used to advance the Company’s Phase 2 clinical program on GVHD as well as for general corporate purposes.

For the Phase 2 trials that commenced on December 7^th, Kalytera Therapeutics will offer common shares as payment to The Salzman Group, which will manage the study. The Salzman Group will also partially fund the study. Drug development is a capital and time intensive process and the approval is never guaranteed. Even if the Company is able to fund its Phase 2 and Phase 3 GVHD program, there is no guarantee the drug will be approved.

Outlook and Valuation

Kalytera Therapeutics is a clinical-stage drug development company and, hence, has not generated any revenues to date. Unlike several cannabis producers in Canada that generate revenues by selling THC and CBD strains to registered patients in Canada, Kalytera can only generate revenues if its lead product gets approval for GVDH or if it can license its CBD prodrugs to other drug-development companies.

Kalytera Therapeutics trades at a meager $32 million market cap, and most of this has come in the last few weeks on announcements related to the patents and Phase 2 trials. However, the announcement of Phase 2 trials led to a 20% fall in its stock price as investors sold into the news. Typical with clinical-stage companies, share price movements in Kalytera Therapeutics will depend on key milestones such as the success of the Phase 2 trials, initiation of Phase 3 trials, amongst others. US-listed comparables that are also focused on CBD-research for drug development trade at relatively higher valuations than Kalytera. Corbus Pharmaceuticals (NASDAQ:CRBP) and Zynerba Pharmaceuticals (NASDAQ:ZYNE), which both have product candidates in Phase 2, currently trade at marketcaps of US$400 million and US$160 million, respectively, while GW Pharmaceuticals, which has numerous late-stage products including one in Phase 3 has a marketcap of over US$3.0 billion.

Drug development is a capital and time-intensive process and the approval is never guaranteed. Hence cannabis-sector investors may want to focus instead on cannabis producers such as Canopy Growth, Aphria, and Aurora Cannabis, which are growing at a rapid pace with further acceleration expected once the recreational market opens up in mid-2018. The recent uptrend in Kalytera’s shares have shown signs of stalling, and a further uptick could come on announcement of successful completion of Phase 2 trials and commencement of Phase 3 trials, both of which are six months away. Any sustained long-term move in shares of Kalytera Therapeutics could come on a Phase 3 announcement and the ultimate final approval of the drug.

Disclosure: Neither the author nor any of the principals at SmallCapPower, or their family members, own units in any of the companies mentioned above.