Allos Therapeutics Stays Neutral - Analyst Blog

We are maintaining our Neutral recommendation on Allos Therapeutics Inc.(ALTH) with a target price of $4.75.

Allos, founded in 1992 and headquartered in Westminster, Colorado, is a biopharmaceutical company focused on the development and commercialization of small molecule drugs for the treatment of cancer. The company was formerly known as HemoTech Sciences, Inc. and changed its name to Allos Therapeutics in October 1994.

Allos recently reported a slightly higher net loss in the third quarter of 2010 mainly because of the higher costs incurred on selling Folotyn (pralatrexate injection), its only marketed product. The company recorded $8.2 million in net product sales during the most recent quarter, short of the Zacks Consensus Estimate of $10 million.

(Read our full coverage on this earnings report:  Allos' Net Loss Up on Higher Costs  )

Folotyn has been approved by the US Food and Drug Administration (FDA) for the treatment of patients with relapsed or refractory peripheral T-cell lymphoma (PTCL).The FDA approval is a significant achievement for the company. We believe the approval will be a major relief for patients suffering from this disease as prior to Folotyn there was no approved drug.

While the drug was available to patients since October, it was launched commercially in January 2010.  Allos intends to file an application seeking European approval of the drug for the treatment of relapsed or refractory PTCL by year-end.

The company also intends to seek marketing approval for the drug to treat patients suffering from relapsed or refractory PTCL in various other countries such as Japan. Approval of the drug in other countries will bolster revenues at Allos.

In addition to PTCL, the company is working on additional indications for Folotyn like non-Hodgkin's lymphoma (NHL) and B-cell lymphoma. In October 2010, the European Commission granted orphan medicinal product status to Folotyn for treating patients suffering from Hodgkin lymphoma (HL).

The candidate is currently being evaluated in other indications also. In October 2010, Allos announced encouraging survival data from a mid-stage study of Folotyn in patients suffering from advanced non-small cell lung cancer (NSCLC) who are, or have been cigarette smokers and did not respond to chemotherapy. The randomized study (n=201) evaluated the efficacy of Folotyn against Roche's (RHHBY) Tarceva (erlotinib)

We note that Allos has already received orphan status from the EC for Folotyn for other indications such as PTCL, cutaneous T-cell lymphoma (CTCL) and non-papillary transitional cell carcinoma (TCC) of the urinary bladder. Folotyn, if approved for any of these additional indications can prove to be a major revenue earner for the company.

However, we are concerned about the excessive dependence of the company on Folotyn. We believe that such dependence on one drug is a risky business model, as the company will not have anything to fall back on if something goes wrong. 

Allos does not possess any other notable pipeline candidate. We note that in June 2007, Allos had to discontinue its developmental programs for efaproxyn, its most advanced candidate at that point of time. The decision to discontinue the development of the candidate was taken after its disappointing performance in a late-stage study in women with brain metastases originating from breast cancer.

A similar instance took place regarding RH1, which was being evaluated in an early-stage study sponsored by Cancer Research UK. However, Allos discontinued the development program in June 2009. Any similar setback will weigh heavily on the stock.

Moreover, the unsatisfactory financial position at Allos also bothers us. We are not comfortable with the policy of the company to raise funds through the issuance of shares as this leads to erosion of shareholder value.

Given these headwinds, we believe that Allos' current valuation adequately reflects its fairly balanced risk/reward profile. We see limited upside from current levels and maintain our long-term Neutral stance on the stock. The stance is supported by the Zacks #3 Rank (Short-term Hold rating) currently assigned to the company.