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Monday, April 4, 2016

Fundamentals Continue To Look Promising For Can-Fite

On March 31, 2016, Can-Fite Biopharma Ltd (CANF) filed its annual report (Form 20F) and provided a clinical and business update for investors. The company has several ongoing programs that should gain traction and peak investor interest as they move forward over the next several months.

Can-Fite is currently trading at just over $2.75 per share, equating to a market capitalization based on the NASDAQ-listed American Depository Shares of only $38 million on a basic count. I believe this level vastly undervalues the pipeline at Can-Fite, which includes three drugs for a total of six different indications. Additionally, Can-Fite is well funded, having exited 2015 with $16.9 million in cash on hand. The quarterly burn rate averaged only $1.2 million in 2015, and although I expect the burn rate to increase slightly in 2016 as the pipeline moves forward, the current cash balance looks sufficient to fund operations through the end of 2017.

I believe Can-Fite is worth multiples of its current valuation. Below I provide a summary of the company's key pipeline assets and provide context and modeling support to justify my belief as to why I see the shares trading at a compelling value today.

Quick Financial Review

As noted above, Can-Fite exited 2015 with $16.9 million in cash on hand. Burn from operations in 2015 totaled only $4.7 million. Operating burn was low in 2015 due to the fact that lead candidate, CF101, completed clinical studies in rheumatoid arthritis and psoriasis early in the year, and much of the second half of the year was spent engaging with U.S. and EU regulators on the planned next wave of clinical programs for the drug.

These talks have proven fruitful, as the company does plan to initiate several clinical studies in 2016, including a pivotal Phase 3 trial with CF101 in rheumatoid arthritis (RA) in the coming months. Accordingly, operating burn is expected to increase in 2016 to approximately $2 million per quarter. Nevertheless, the $16.9 million on hand looks sufficient to fund operations for roughly two years at this projected rate, and I note this includes no partnerships or out-licensing agreements, which I believe the company has a real opportunity to close in 2016.

The $16.9 million in cash equates to nearly half of Can-Fite's approximate $38 million in market value as of today. I believe the enterprise value of only $21 million vastly undervalues the shares, as Can-Fite looks to be a well-run company with low dilution history and potential over the next 12+ months, and an interesting mid-to-late stage pipeline with novel drugs targeting some very large disease indications.

CF101 For RA - Phase 3 To Begin Shortly

Perhaps the biggest news out of Can-Fite so far in 2016 came in mid-March 2016 when the company announced it has submitted its Phase 3 protocol for CF101 in the treatment of rheumatoid arthritis (RA) to the European Medicines Agency (EMA). The submission came after a face-to-face meeting with EU regulators earlier in the year, and the global Phase 3 trial is expected to commence in the second or third quarter 2016.

Can-Fite is guiding that the Phase 3 trial will be a multicenter, randomized, double-blind, placebo-controlled, parallel-group study that will investigate the efficacy and safety of CF101 administered orally twice daily for 16 weeks to patients with active RA treated with conventional disease-modifying drugs (cDMARD). The study will have three arms: 1 mg CF101, 2 mg CF101, and a placebo control. Tablets will be given orally twice daily (BID). The study is expected to enroll 360 patients and the primary endpoint is expected to be disease activity as measured by ACR response.

Can-Fite plans to enroll patients at centers in several European countries, along with sites in the U.S., Canada, and Israel. Importantly, inclusion criteria will include patients who have high expression of the A3 adenosine receptor (A3AR), a biomarker that has been shown by the company to identify patients who will respond to CF101. Based on Can-Fite's Phase 2 clinical studies with CF101 in patients with active RA, the percentage of patients with high expression of A3AR is estimated to be approximately 70%.

I'm very pleased to see that the company will be using A3AR biomarker identification for the trial. I'm a big fan of personalized medicine and believe that this type of targeted approach has positive implications on both regulatory approval and reimbursement once commercialized. I'm also very pleased to see that the program will include several clinical sites in North American (U.S. and Canada) and believe this should help facilitate Can-Fite's talks with the U.S. FDA on potential approval in the U.S. should the data justify an application following completion of the trial.

I do not think the market yet appreciates the potential for CF101 in RA. For investors not familiar with CF101 as a treatment for RA, I prepared a detailed article in December 2015 comparing the drug to the market leader in this category and the world's current number one best-selling drug, the anti-TNF-alpha biologic, AbbVie's Humira® (adalimumab), as well as Pfizer's FDA-approved orally available Xeljanz® (tofacitinib) and Eli Lilly's baricitinib, which is currently under FDA review. I encourage investors to view the RA article, because what I found is that CF101 (piclidenoson) compares quite well to both Xeljanz® and baricitinib, as well as Roche's Rituxan® and Bristol's Orencia® in similar-stage patients.

CF101 also looks superior to methotrexate (MTX), a drug that is part of the standard of care and used by roughly 90% of DMARD-naive RA patients. With improved safety, I believe CF101 has the potential to replace MTX as a standard-of-care for moderate-to-severe RA patients with high expression of A3AR.

RA is an enormous market opportunity. According to Visiongain, the global rheumatoid arthritis market is forecasted to reach $38.5 billion by 2017. Pfizer reported Xeljanz® sales of $523 million in 2015, with $172 million coming in the fourth quarter alone. The consensus according to Capital-IQ is for approximately $1.5 billion in sales in 2020. CF101 also looks superior to Bristol's Orencia®, a drug that did $1.9 billion in global sales at Bristol-Myers in 2015.

As such, Can-Fite will need to partner CF101 to compete with industry behemoths like AbbVie, Pfizer, Bristol, and Eli Lilly, but given some of the recent deals we have seen in this area like Gilead-Galapagos, Celgene-Receptos, and Lilly-Incyte, big pharma is clearly looking to biotech for anti-inflammatory drugs and CF101 has a number of unique characteristics that make it a potential attractive in-licensing candidate.

CF101 For Psoriasis - Protocol Application Expected Soon

Beyond RA, CF101 also has significant potential as a treatment for psoriasis. This is not surprising, considering AbbVie's generates over 50% of its $14 billion in global sales for Humira® from dermatology. Other anti-TNF drugs like Enbrel® and Remicade® are also major players in both RA and psoriasis. Pfizer is attempting to gain approval for Xeljanz® in psoriasis but received a complete response letter from the U.S. FDA in the fourth quarter last year. Can-Fite is currently working to complete the design of a Phase 3 study for CF101 in the treatment of psoriasis, with a goal to file with the EMA in the first half of 2016. Patient enrollment is targeted to begin in the fourth quarter of 2016.

Perhaps the drug that makes the most sense to compare CF101 to is Celgene's Otezla® (apremilast), a drug that generated $472 million in global sales in 2015. Otezla® is a small molecule inhibitor of PDE4, an enzyme responsible for the degradation of cAMP. The inhibition of PDE4 results in an increase in cAMP, which in turn regulates a number of pro-inflammatory and anti-inflammatory mediators including TNF-α, IL-23, and IL-10 (1). The downstream mechanism is very similar to CF101, which acts through adenosine agonism and the inhibition of cAMP downstream effectors, PKA and protein kinase B/Akt (PKB/Akt). The reduction in the activity of these two kinases results in the deregulation of the Wnt and the nuclear factor kappa-B (NF-κB) signal transduction pathways, leading to the inhibition of tumor necrosis factor α (TNF-α), interleukin-6 and -12, macrophage inflammatory proteins and receptor activator of NF-κB ligand (RANKL) (2, 3).

Due to the similar mechanism, a direct comparison of the two drugs can be made. This is an analysis that I conducted in August 2015, and I encourage investors to view that article. The chart below is that direct comparison of CF101 and Otezla® (apremilast). Investors should take notice of the standardized the Y-axis of PASI responder scores and the X-axis of time-on-drug. Although Otezla® outperforms CF101 at week 16 on both PASI-50 and PASI-75, the Otezla® efficacy quickly begins to wain, declining by week 32 (4). On the contrary, CF101 efficacy continues to improve at week 32, far outperforming Otezla® with an upward trajectory at the end of the study.

According to Capital-IQ, analysts believe Otezla® will post sales of approximately $2.5 billion for Celgene in 2020. Celgene is seeking approval for the drug in RA as well. As noted above, Otezla® looks like the best direct comparator for CF101 given the similar downstream mechanism of action. Similarly to RA, I expect Can-Fite to seek a commercialization partner for the drug in psoriasis. It is likely that the company will look to strike one deal for CF101 in both indications.

CF101 in Glaucoma - Data Expected This Quarter

Can-Fite has 82% ownership in a publicly-traded ophthalmology-focused subsidiary called OphthaliX, Inc. (OPLI). OphthaliX is developing CF101 for eye diseases such as glaucoma and uveitis. The company is currently conducting a Phase 2 clinical study with CF101 for the treatment of glaucoma, with data expected here in the second quarter 2016. CF101 represents an interesting approach to treating glaucoma, as the vast majority of currently approved treatments for the disease are eye drops or direct injections into the eye. CF101 would be an oral medication that patients with advanced glaucoma might see a benefit from when first-line prostaglandin (PGA) eye drops are no longer effective. Today these patients have little treatment options before surgical trabeculectomy and/or tube shunts are required.

CF102 For Liver Cancer (HCC) - Phase 2 Data Later This Year

In September 2015, Can-Fite received U.S. FDA Fast Track designation for CF102, another A3AR agonist, as a second-line treatment for hepatocellular carcinoma (HCC), the most common form of primary liver cancer. This is an indication for which Can-Fite has also been granted Orphan Drug status given the high unmet medical need and lack of effective treatment options for patients failing first-line therapy.

Can-Fite is currently conducting a Phase 2 trial with CF102 in patients with advanced HCC and Child-Pugh B cirrhosis (NCT02128958). A total of 78 patients will be randomized 2:1 to receive 25 mg of CF102 or placebo twice a day for consecutive 28-day cycles. The study is currently ongoing in Israel and Europe. The primary outcome of the study is overall survival, which will not be evaluated until after 75 deaths have occurred. The first patient was dosed in December 2014 and management anticipates data from the study in during the second half of 2016.

The primary market for CF102 is in liver cancer patients failing Bayer's Nexavar® (sorafenib), a drug that generated just over $1 billion in global sales in 2015. Clinical data suggests that the Child-Pugh B Nexavar-failure market is rather large, estimated at over 90% of the eligible patients that take the drug (5). Can-Fite previously completed an open-label Phase 1/2 study with CF102 in 18 HCC patients that yielded encouraging results (NCT00790218). According to the 2013 publication, median overall survival in the study population, 67% of whom had received prior Nexavar®, was 7.8 months, and for Child-Pugh B patients (28%) it was 8.1 months. Stable disease by RECIST was observed in four patients for at least four months. CF102 also helped maintain liver function over a six month period (6).

With a minimum of 25,000 targetable patients in the U.S. and EU, the peak opportunity to Can-Fite looks like approximately $250 million. Based on Nexavar® sales, Onyx has been able to penetrate about 30% of the addressable market. Importantly, several new competitors including Bristol-Myers with Opdivo® (nivolumab) and cabozantinib by Exelixis (EXEL) are expected to enter the market in the next few years. Nevertheless, if Can-Fite, through a commercial partnership similar to the one Onyx signed with Bayer/Amgen, can accomplish a similar level of penetration in HCC to sorafenib, the U.S. revenue opportunity for CF102 is $150 million. The opportunity in Europe is likely another $100 million in my view.

However, the interesting opportunity for Can-Fite is in countries in Southeast Asia where the rates of primary liver cancer are significantly higher due to epidemic-like infection rates of hepatitis B and C. The World Cancer Research Fund International estimates that 80% of the global primary liver cancer patients on earth are found in less developed countries outside the U.S. and EU. For example, the highest incidence rates can be found in Mongolia, Lao, Gambia, Vietnam, Korea, Thailand, Cambodia, and China. CF102 approval in these regions easily doubles my peak sales forecast.

I believe there is a meaningful opportunity for Can-Fite to sign licensing and distribution agreements in areas like China and Korea. Management has already out-licensed its other clinical-stage candidate, CF101, to Kwang Dong Pharmaceutical in Korea, so this management team has experience partnering with large Korean pharmaceutical companies. They also have experience negotiating term sheets with companies in China and Japan. Licensing deals that provide upfront cash to Can-Fite for CF102 in Asia will help support the U.S. and EU development plans. This cash could help extend the cash runway well into 2018.

CF102 For NASH - An Exciting New Opportunity

On November 23, 2015, Can-Fite announced the development of CF102 will be expanded into NASH based on compelling preclinical data. I wrote an article providing a brief analysis of this data and the opportunity in NASH back in November 2015, and I encourage investors to view that NASH article if they want to learn more.

NASH is believed to be the next big global pandemic given the soaring rates of obesity, diabetes, and metabolic syndrome all over the world. The mechanism of action for CF102 looks like a pan-hepatic improver of liver pathology, applicable to earlier-stage liver diseases such as NAFLD and NASH. I have yet to model sales of CF102 in NASH, but it is clear that this is an area that has attracted significant attention from some of the industry's largest players. For example, just this morning Gilead Sciences (GILD) paid $400 million to acquire Nimbus Apollo, Inc., a wholly-owned subsidiary of Nimbus Therapeutics, and its Acetyl-CoA Carboxylase (ACC) inhibitor program.

The preclinical data on CF102 in NASH are impressive, but I believe that human proof-of-concept data must be generated before any monetary value to the asset should be ascribed. That being said, the value of CF102 in NASH could dwarf the value in HCC, or even what I model above for CF101 in RA and psoriasis. The NASH market is enormous and wide-open at this stage, so CF102 in NASH represents nice upside to investors in my view. A Phase 2 study is expected to start in 2016.

CF602 - IND for Sexual Dysfunction Expected Late 2016

I'm not going to spend a lot of time talking about CF602 for the treatment of erectile dysfunction (ED). CF602 has yet to enter the clinic; the investigational new drug (IND) application is planned in the fourth quarter 2016. That being said, I do think that CF602 could address a big missing piece of the ED market. I wrote a short article on the subject in October 2015. It was a rather fun article to do background research on, specifically with respect to the marketing practices of Pfizer with Viagra® and Lilly with Cialis®, so I hope investors will check it out. The takeaway on CF602 is that the drug does seem to have an interesting niche and could become a major driver of valuation for Can-Fite in the coming years.


I believe there exists a considerable investment opportunity in shares of Can-Fite at this level. CF101 and CF102 are targeting large market opportunities and the existing data looks favorable when compared to commercially validated drugs like Otezla®, Xeljanz®, and Nexavar®.

To value the shares, I've conducted a detailed NPV analysis that incorporates peak sales projections for these drugs, an appropriate discount rate, and probability adjustment based on odds of success stemming from the stage of development and my analysis of the existing clinical data generated by the company to date. My work leads me to believe that Can-Fite's pipeline is worth approximately $100 million in value. This equates to roughly $6.00 per fully-diluted ADS.

As noted above, Can-Fite has sufficient cash to fund operations in 2016 and 2017, and with several important catalysts on the horizon over the next few quarters, I believe the shares are attractive for small-cap biotech experienced investors.


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