ADC Therapeutics: Real Opportunity With Real Risk In 2024 (Rating Upgrade)

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ADC Therapeutics has experienced a 200%+ recovery since being undervalued and trading below their cash on hand.The company's prospects are now uncertain as they face challenges in getting a foothold ...

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Falling into penny stock territory, ADCT has since experienced a resurgence, something like a 200%+ recovery since my buy recommendation, agreed upon by analyst Eugene Lindon. As we are well into the first half of 2024, now the prospects for the company are a lot murkier, as they've moved out of what I view as \"obviously\" undervalued, bringing into stark contrast the real challenges they've had in getting a foothold for their approved antibody-drug conjugate. Today, they are sitting at a critical juncture for the loncastuximab project, with a phase 3 trial defining pretty much all of their near-term aspirations. This sets up a massive opportunity for market expansion, but if that study does not go well (as has been the case relatively recently), then you can expect that market sentiment to take a nosedive once again. Let's have a look. Pipeline Updates Loncastuximab tesirine  The ongoing, phase 3 LOTIS-5 trial is the confirmatory study for the third-line setting, but it also includes patients who have only failed one prior line of therapy, opening up the possibility of label expansion into the second line. ADCT sees this second-line setting as more than double the size of third-line treatment, given patient prevalence data. So you can see a lot riding on the timely completion and success of this trial. ADCT has guided completing enrollment of LOTIS-5 sometime later in 2024. Previous safety run-in presentations (sort of a preamble to the main study results) have highlighted favorable duration of response and progression-free survival findings in the first 20 patients enrolled so far. The LOTIS-7 trial continues to enroll patients into different dose escalating treatment arms, opening up potential data readouts for combinations involving loncastuximab tesirine in non-Hodgkin's lymphoma. The company also announced favorable findings from an investigator-initiated trial assessing the value of adding loncastuximab tesirine to rituximab in patients with relapsed/refractory follicular lymphoma, opening the door to expanding reach in this direction. The company intends to explore regulatory pathways for this setting, but nothing definitive has been discussed yet. ADCT-601 (Mipasetamab uzoptirine) We will also soon get a taste of findings for the anti-AXL antibody-drug conjugate ADCT-601. ADCT will be giving a suite of presentations at this year's AACR meeting in early April, one of which is going to highlight initial data from a phase 1 study enrolling patients with soft tissue sarcoma. ADCT has guided that these initial findings show favorable tolerability as signs of tumor control, and this has led them to begin screening patients with pancreatic cancer, as well. So the AACR presentation will be an important first look, but I wouldn't get my hopes to high that they'll be particularly groundbreaking, since phase 1 studies rarely are. Financial Overview As of their latest filing, ADCT held $336.3 million in total current assets, including $278.6 million in cash and equivalents. They also had $303.6 million in deferred royalty obligation, and another $112.7 million in senior secured term loans. Product revenues reached $69.1 million for the year, down from $74.9 million in 2022. They were able to trim up operating costs, however to $235.5 million compared with 333.3 million in 2022. After interest income and expenses totaling a loss of $29.4 million, the net loss for the year was $240 million. At this rate, ADCT has roughly one year of cash on hand to fund operations at these current levels, although it is worth pointing out that revenues related to partnerships have undulated substantially over the years, and there is the possibility of seeing a boost from those in the coming year. Strengths and Risks Strength - An approved, marketed drug Loncastuximab tesirine continues to be generating significant revenue, and ADCT has done a good job of tapping into the market opportunity they have with the third-line approval. This gives an element of stability to the company, and helps to keep the funding solvent that will help propel future development. Strength - An emerging pipeline of promising agents We're also finally getting a decent look at where else ADCT might be able to go, as AACR is going to highlight early clinical data on their AXL project. And they have other antibody-drug conjugates in novel targets that might be ripe for outlicensing and further development. This diversification is going to be critical for de-risking the financial outlook for the long term. Risk - Significant debt and expenses related to it The long-term debt that ADCT has used to fund operations comes with a significant expenditure, contributing over $10 million against the bottom line. At the rate of loss they've experienced, this is a significant drag for ADCT in my view. Risk - Cash running out in the next year Speaking of the drag, ADCT is on track to run out of funds this year, with most of their fortunes resting on successful clinical development of loncastuximab tesirine in that second-line DLBCL setting. I expect if they get a positive data readout, they will tie that to an equity raise. Risk - No guarantees for loncastuximab expansion Anyone who's been following the ADCT story knows that they've lived and died by the news highlighting development of loncastuximab tesirine. In my first outing with ADCT, failure to expand the pipeline was one of the key news items for 2023. The failure of key trials like LOTIS-9 means that market confidence in positive readouts is relatively low. With no slam dunks on deck, it is important temper expectations about this drug. Bottom-Line Summary ADCT continues to trade on par with the assets they have on hand, indicating ongoing poor confidence in the future of their main drug program. This is certainly a risky proposition, but where the market doesn't think there's anything is precisely where we find the biggest surprises. If LOTIS-5 ends up being successful, then it would portend a near-tripling of the market size for loncastuximab tesirine. To me, this makes a potential valuation in the billions a reasonable proposition.  For this reason, ADCT continues to present a significant opportunity for those who are willing to tolerate the risk. However, although my rating is an upgrade to \"Strong Buy,\" I would also caution that the risk of significant losses is higher than in my previous writings, where ADCT was trading as if they were in imminent failure. Now, they're valued relatively neutrally, and all success from here depends on making inroads in the clinic. 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