Expert Financial Analysis and Reporting

SmithOnStocks Mailbox

About the Mailbox:

My mailbox comments are brief articles on stocks in which I am involved. These can come from recent events or from subscribers’ questions. They are meant to address specific issues about these stocks and are not full and balanced reports. Please refer to the Reports section of my website for more complete analyses.

Neuralstem: We Should Soon See the Full Results of the NSI-566 Neural Stem Cell Trial in ALS (CUR, Buy, $1.90)

Stock Has Been Very Weak

I would be an aggressive buyer of the stock at these levels.

The stock has been pounded since it reported topline results in its phase 2 trial of NSI-566 neural stem cells on March 12, 2015. The stock has declined from a price of $3.74 on the day before the press release to a current price of $1.84. I wrote a note on the results on the phase 2 trial that discussed results in depth called Neuralstem: A Closer Look at Encouraging Phase 2 Results for NSI-566 Neural Stem Cells in Treating ALS (CUR, Buy, $2.36) which you may want to refer to.The disturbing information in the phase 2 trial as discussed in that report was the rapid decline in function of some non-responders could be interpreted as NSI-566 stem cells actually worsening the status of ALS patients.

The situation was made much worse because the lead investigator of the study, Eva Feldman, is preparing a manuscript that will be published in a major (undisclosed) medical journal. The ethics governing the interaction between investigators and companies requires that companies not talk about results before they are published. Hence, Neuralstem has been in “radio silence” for over a month in which management could not discuss what happened with the non-responders. This has been a horrible situation for shareholders and has made the stock easy prey for the hedge fund wolf packs that gang up on and short emerging biotechnology stocks.

Phase 2 Results Should Soon Be Published and Could Lift the Stock

I believe that the phase 2 results will be published sooner rather than later and we will finally get the investigators’ interpretation of the data. I have no actual knowledge of what happened that caused such a rapid decline in the functioning of non-responders. However, there are strong reasons to believe that there will be an explanation that explains the rapid decline and if that is the case, we could see a good bounce in the stock. I think this will be the case based on two factors: (1) the investigators in the trial know the actual data and are all positive on the phase 2 results and (2) Neuralstem plans to start a 50 patient phase 2 randomized study this summer. If there was a serious safety issue with the NSI-566, the FDA most likely would have stepped in and not allowed the phase 2 trial to begin.

So do I know what happened to the non-responders that caused such a rapid decline in function? No, I don’t, but I have a hypothesis. I think that we have seen enough evidence to suggest that the surgery used to implant the cells, although highly invasive, is safe. I also think the same can be said about the neural stem cells. If I am correct and the issue is not with the surgery or neural stem cells, the logical cause for the rapid decline of non-responders is patient selection. From the phase 1 trials we know that bulbar ALS patients, in which the neuron destruction starts in the cervical rather than the thoracic region of the spine, is characterized by a rapid decline as was seen with the non-responders. This leads me to hypothesize that the non-responders might have been bulbar patients.

Agenus’s QS-21 Vaccine Adjuvant Pipeline is Building Significant Stock Value (AGEN, $6.65, Buy)

Glaxo’s Shingle Vaccine Could Take Over the Market

Glaxo reported data as shown in the April 28, 2015 edition of NEJM that demonstrated that its shingles vaccine HZ/su is superior to MRK’s Zostavax for all age groups. HZ/su efficacy in its phase 3 trial was 96% in adults aged 50-59, 97% in adults aged 60-69 and 98% in adults 70+ years old. According to the Zostavax label, corresponding efficacy is 70%, 64% and 38% in those age groups. Because the incidence of shingles rises rapidly with age, these are very compelling results and suggest that Zostavax will lose most of its market share to HZ/su.

Implications for Agenus

Agenus’ QS 21 adjuvant is used in HZ/su and I estimate that the Company will receive a 2% to 3% royalty on HZ/su sales. Merck reported Zostavax sales of $762 million in 2014 and another $103 million of sales was reported from a joint venture with Sanofi Pasteur. Hence would wide sales were about $865 million. If HZ/su takes 50% of the market, this would amount to about $2 to $3 million of royalties for Agenus and at 75% market share would be about $3 to $5 million.

I recently reported that Agenus royalties for the Glaxo malaria vaccine could be $6 to $9 million by 2020. This suggests that in five years (2012), the combined royalties on the malaria vaccine and the shingles vaccine could be contributing $9 to $14 million. There are no offsetting costs and I would not expect Agenus to be paying taxes in that year so this would drop straight to the bottom line.

Capitalizing this projected 2020 net income contribution by assigning a P/E ratio of 15 times earnings would result in projected market value of $135 to $210 million in 2020. If we then use a 15% discount rate, the net present value is $67 to $104 million or $1.20 to $1.90 cents per share. Take these numbers with a grain of salt, but the implication is clear that products could add significant value to the stock and by this estimate justify 15% to 25% of the current stock price.

There is the potential for additional value to arise from the QS 21 vaccine adjuvant platform. In addition to the malaria and shingles vaccines, it is being used as an adjuvant in 18 other vaccine trials.

Celldex: Highlights of 1Q, 2015 Conference Call April 29, 2015 (CLDX, $24.16, Hold)

I published an update on April 13 called Celldex Pipeline Update and Investment Thesis (CLDX, Hold, $28.56) in which I went from a Buy to a Hold. For those looking for more in-depth background in Celldex, I would suggest your reading that note.

Rindopepimut Data

The ReACT data for rindopepimut in the treatment of recurrent glioblastoma will be presented in an oral presentation at ASCO on May 31, 2015 at 8 AM. There should be more mature data on overall survival and progression free survival. There is some uncertainty as to whether the data will improve over that presented in the interim analysis in November, stay about the same or improve. My bet is that it will improve.

The React trial was not a pivotal trial, but if the data is the same or better, I would expect a BLA to be filed shortly after ASCO and I believe that the FDA will approve the drug for recurrent glioblastoma in patients with the EGFRvIII mutation that may be 30% of the glioblastoma population

I expect that an interim analysis in the phase 3 ACT IV trial of rindopepimut in newly diagnosed glioblastoma will occur in mid-2015. My expectation is the Data Monitoring Board will say that there are no safety issues and that the trial should continue. This is not likely to have any impact on the stock.

Varlilumab is Being Watched Closely by Investors

Celldex is aggressively testing varlilumab in various trials in combination with Bristol-Myers Squibb’s checkpoint inhibitors Opdivo and Yervoy, Astra Zeneca’s checkpoint inhibitor MEDI 4736, Pfizer’s Sutent and with a RAF/MEKi. This should lead to numerous data releases over the next 12 to 18 months. I think that investors are expecting some positive data and this expectation is built into the stock.

Glembatumumab Trials Are Enrolling

The Company says that enrollment in the METRIC trial of glembatumumab in triple negative breast cancer appears to be accelerating. The press release says that enrollment is extending into 2016 which I believe suggest completion of enrollment in mid-2016 or so. The phase 2 trial in metastatic melanoma is enrolling and trial in small cell lung cancer and pediatric sarcoma should begin enrolling in 2H, 2015.

Some Upcoming Events to Put on Your Calendar

Agenus: R&D Day May 14, 4:30 PM EST

Antares: Presentation at Deutsche Bank Conference, May 6, 2:10 PM EST

Alimera: 1Q, conference call, May 7, 4:30 PM

Cytokinetics: R&D day, May 12, 8:00 AM EST

Discovery Laboratories: Phase 2a enrollment is completed, could see results in May. The key to look for are signals of efficacy

ImmunoCellular Therapeutics: 1Q, Conference call, May 12. 5 PM EST

Repligen: 1Q, conference call, May 7, 8:30 AM EST