Expert Financial Analysis and Reporting

Investment Thesis

I have been pretty much silent on Northwest Biotherapeutics for some time. The reason is that as an analyst I can only interpret data and news flow and there has been nothing to interpret. The stock is selling at $0.34 down 95% from one year ago. The downward move is extreme but significant weakness with the lack of news flow is not surprising. Biotechnology stocks are fueled by planning and conduct of clinical trials and data resulting from those trials. There has been no meaningful clinical data or information on the planning for potential new clinical trials for over one year and this has been disastrous.

An equally troubling issue is that the Company is in severe financial distress. It has cash on hand that likely can fund operations only until November of this year. From this bleak perspective, the stock price seems to be saying that Northwest’s products have failed and it is on the verge of bankruptcy. The wolfpack is waving victory flags and waiting for an announcement of failure of DCVax-L in its phase 3 trial in newly diagnosed glioblastoma to deliver the coup de grace and drive the Company into bankruptcy. This is a scenario with a meaningful probability of occurrence that has been driving the stock.

Still, I believe that there is another plausible, diametrically opposed and much more positive scenario which also has a reasonable chance of occurring, but is not factored at all into the current stock price. In this report, I put forth a hypothesis that seeks to explain why management has been silent for a year and further speculates that the DCVax-L phase 3 trial could be successful. Obviously this would be explosively positive and almost totally unexpected news. .

Success would validate the dendritic cell cancer vaccine technology and create credible belief that planned but not yet initiated trials of DCVax-L combined with a checkpoint inhibitor (probably Opdivo) in recurrent glioblastoma could begin as well as phase 2 trials of DCVax Direct in certain inoperable solid tumors. These phase 2 trials are comparable in design to ones which have led to rapid approvals in certain cancer indications for the checkpoint inhibitors Opdivo and Keytruda. They are also comparable to phase 2 trials which management of Juno and Kite claim quickly will lead to approval of their CAR-T products in hematological cancers.

Let me emphasize at the start that I don’t know the reasons and resultant decision for NWBO’s silence on almost all aspects of its operations for the last year. The CEO Linda Powers has a huge amount of her personal wealth, perhaps as much as $50 million, at risk and other members of management also have deep financial interests. While the bloggers who work with the wolfpack have alleged that Ms. Powers and management somehow have conspired to benefit from this, the charge is absurd on its face. I can only conclude that management’s hands have been tied for some reasons and in this report I will hypothesize on what those reasons might be. I must emphasize that mine is a hypothesis made without any information from management.

I know that you are going to ask what is the probability of occurrence of the doomsday scenario that I laid out in the opening paragraph as compared to the optimistic outlook I then laid out?  I don’t know how to answer this other than to say that there is a reasonable chance for each. It does appear to me that the market is assigning a very high probability for failure and virtually none for success. Failure in the phase 3 DCVax-L trial would lead to a further sharp price decline or bankruptcy. Success could produce dramatic upside. I note that Kite is valued at $3 billion. With success in the phase 3 trial, I think that the commercial potential of Northwest’s technology could be viewed as superior to Kite. (I have done extensive work on and am preparing a detailed report on Kite that supports this conclusion).

NWBO is currently selling at a market capitalization of about $50 million. I don’t think that the stock would immediately jump to the same valuation of Kite with success in the DCVax-L phase 3 trial. The Company is severely hamstrung by its weak cash position and raising money to fund commercial operations and new clinical trials would put something of a lid on the stock. However, I think that speculating about a $500 million or more valuation is not unrealistic. If you are prepared to look at this situation as an option in which you could lose all of your investment or $0.34 per share against an upside of several (many) times, this is an interesting speculation.

But, is there really any reasonable chance for success of DCVax-L in the phase 3 trial in newly diagnosed glioblastoma. The purpose of this report is to show that the answer is yes. Let’s hypothesize.

The Wolfpack’s Tracks Are Everywhere

The wolfpack has launched a nearly three year long, sophisticated attack on NWBO on numerous fronts. Their sophistication and execution are as amazing as they are reprehensible. The NWBO experience reconfirms my view that the wolfpack conducts coordinated stock manipulations on a massive scale. While this this attack on NWBO is particularly egregious, it is just one of hundreds of companies that have been attacked over the years.

The modus operandi is to coordinate an attack on several fronts. Wolfpack sponsored and often anonymous bloggers are used to disparage the technology and clinical trial data and to contrive allegations of management misconduct. This is closely followed by lawsuits from law firms that appear to work hand in glove with the wolfpack and their bloggers. Less visible, the wolfpack then will often petition the SEC, NASDAQ and the FDA raising charges of misconduct and illegality. In many cases, former employees of these federal agencies are employed to orchestrate the attacks and can obviously do so with great skill. Tiny companies like NWBO can be overwhelmed. Of course, all of this is to set the stage for a massive short selling attack.

The Basis for My Hypothesis

We have seen the obvious wolfpack tactics on display-an unending series of scurrilous blogs, law suits and petitioning NASDAQ. However, I want to focus on a more subtle issue that seems to have brought the FDA into play in the phase 3 trial of DCVax-L and that may explain the Company’s silence over the last year. The one thing that NWBO publicly has said is that it has provided and the FDA has looked at information on the phase 3 trial. From my perspective, this is an extraordinary statement and it is the basis for the hypothesis that I am now putting forward.

The FDA is adamant on the blinding of data in controlled clinical trials like the DCVax-L phase 3 trial.  Only the Data Monitoring Committee (DMC) is allowed to take an interim look at data at specified time points in the trial. The most important reason for an interim look is to determine if there are any safety issues. The DMC may also (not always) look at efficacy data to see if the trial has met its primary endpoint or alternatively that the trial has no chance of reaching its endpoint and that it would be futile to continue. I am dismissing the possibility that DMC found that the trial reached its primary endpoint at an interim look because this would have led to an immediate announcement.

Could there then have been an interim look in which the DMC determined that it was futile to continue the trial? In this event, the FDA almost certainly would allow NWBO to continue the trial if there was no safety issue. Given that immuno-oncology drugs take much more time to show a clinical effect than chemotherapy and other cancer therapies, it would be likely that the FDA would want the trial to continue. Another reason is that this is a large, stratified trial that is analyzing several important subsets of patients and information gained might be very important for conducting future trials of DCVax-L and other drugs. There is great scientific value in the trial even if it fails to reach the primary endpoint.

In either the case of the DMC determining that the trial had met its endpoint or that it was futile to continue, I believe that the FDA in no event would have gotten involved and asked for information from the trial which I can only imagine would involve actual patient outcomes. This is a critical observation. I can only conclude that there was a significant safety concern raised by the DMC or some other source that would have compelled the FDA to unblind itself and determine if indeed there was a safety issue. The FDA involvement began over a year ago and NWBO reported that it was providing information to the agency. The Company did not elaborate further but I speculate (I want to emphasize the word speculation) that this might have meant that its CRO may have supplied clinical data to the agency. The FDA has since concluded that that there is no safety issue as the trial has continued to treat patients who were already enrolled. It will be extremely interesting when all of the facts are known as to what compelled FDA in the case of my hypothesis to take this unusual and in my experience unprecedented step of unblinding themselves.

If I am correct, I conclude that the FDA is in a quandary as it now deals with the issue that it is unblinded to some (much) of the data in the trial. This is not a desirable position for the FDA as it wants to remain completely blinded until the trial is completed and the data analyzed.

Could it be the case that the data is positive and supports approval? Perhaps. Linda Liau, a lead investigator on the trial, has publicly commented about patients in the trial who were enrolled at her center. Those who were initially given standard of care and whose cancers progressed were then given DCVax-L. She said anecdotally that patients who were crossed over to DCVax-L showed marked improvement. On another point, the information arm of this trial suggested encouraging results in patients who were not enrolled in the trial because their cancer progressed before treatment began. While they were not included in the trial, they were still given DCVax-L and followed for efficacy. .

I think these are meaningful signals of efficacy from the trial. In addition phase 1/2 results were very encouraging. They support the idea that the FDA may have looked at this and much other data and has concluded that the trial could be successful, but wants to make sure by having the trial run to conclusion. This is obviously very positive, but there is another interpretation that explains this. As I mentioned before, even if the FDA concluded that the primary endpoint would not be reached, it, would still want to complete the trial for the valuable information that it could provide.

This highly unusual FDA involvement would also explain the silence of NWBO management. They would not want to appear to be putting any pressure on the FDA. Hence, they may have had no course but to remain silent.

Financial Issues

The Company is operating on the verge of insolvency. The monthly operating cash burn for the first six months of 2016 was about $5 million per month. Management has suggested that cash burn could be sharply lower in coming months, something on the order of $1.5 million. The cash balance was $2.1 million as of June 30 and $4.8 million has been raised so far in the second quarter bringing the effective cash balance for 3Q, 2016 to $6.9 million. If the cash burn is $1.5 million per month, the Company would run out of cash in the middle of November.

The Company clearly needs to raise cash. The stock is selling at $0.34 and an equity raise would probably have to be done at a discounted price of about $0.28. This means that raising $10 million would require selling 36 million shares. It would also likely have to give 50% warrant coverage which would add 18 million more potentially dilutive shares. The current number of shares outstanding is 104 million so that raising this amount of cash would require giving away more than one-third of the Company. In addition, there are 48 million other potentially dilutive shares so that the potential number of shares could ultimately reach over 200 million shares. Sadly, $10 million would only carry the Company until the late second quarter of 2017 and might not allow the start of the important phase 2 trials. There is speculation that a second mortgage on the UK manufacturing facility might bring in $10 or $20 million and would be a less dilutive way of raising money.

Looking Back over the Last Unhappy Year

In August of 2015, NWBO seemed poised for a string of important announcements. The DCVax-L phase 3 trial in newly diagnosed glioblastoma was nearing completion of enrollment and the Company was poised to start phase 2 trials of DCVax Direct in inoperable solid tumors which, if successful, could be the basis for regulatory approval. The Company also seemed close to beginning phase 2 trials of DCVax-L combined with one or more checkpoint modulators, these could also lead to approval. The stock was trading at $10 to $11 per share and the equity market at the time was quite receptive to biotechnology offerings. Northwest was in a position to raise perhaps $150 million or more of cash that would have allowed the Company to bring in enough money to finish all of these trials. NWBO had been fighting a brave fight against a savage short selling attack and it looked like it had won.

Then in mid-August, the Company announced that screening in the phase 3 trial of DCVax-L had been temporarily halted, but patients enrolled in the trial would continue to receive treatment in accordance with the trial protocol. The Company offered no reason for the halt but said in the press release that “The Company is in ongoing dialog with regulators, and providing further information. The Company hopes that this issue will be resolved soon.” Northwest seemed to imply that this issue would be resolved by late 2015 or early in 2016 and this was my expectation.

Also in August 2015, the short sellers launched a heightened attack on the Company. A group of hedge funds writing on Seeking Alpha under the anonymous name Phase Five Research published an obviously contrived and vicious report about the Company which was published by Seeking Alpha without any questions. This was even though there have been reports that one or more of the firms suspected to be involved in writing this report is under investigation for securities fraud and stock price manipulation.

Following the Phase Five report, NWBO at the urging of its major shareholder Neil Woodford, formulated an independent committee to look at charges raised in that report. Woodford was apparently unnerved by the Phase Five report. One of the tactics of the short selling conspiracy is to charge that managements (Linda Power in the case of NWBO) are involved in criminal stock manipulation. This is like John Dillinger alleging that Melvin Purvis was the criminal. We should hear the conclusions of this committee in coming months and I expect this to make clear that Phase Five is the John Dillinger in this case.

With no input from management, let’s look at what we can infer. It seems clear that management had expected the screening halt to be lifted quickly in late 2015, for enrollment to be completed and for the phase 2 trials of DCVax-L and DCVax Direct to begin. I have seen speculation that an interim look at the phase 3 trial for efficacy might have indicated that the trial would not reach its end point, but there was no safety issue. Immuno-oncology drugs sometimes have delayed responses that could confound an interim analysis. If so, there might have been an agreement with the FDA to continue to follow patients already enrolled in the trial. Management has said that the phase 3 trial of DCvax-L has enrolled 300 patients (and perhaps more) of the targeted goal of 348. At some point and perhaps before the end of the year, we should see topline results. I think there is a reasonable cance of success, but even if the trial fails, it could yield valuable information for additional trials.

I believe that Northwest has one of the most exciting technology platforms and pipelines in immuno-oncology and in my opinion has clinical data as compelling as the current engineered T-cell investment darlings Juno and Kite. Juno and Kite sell at market valuations of $3.5 billion and $3.0 billion while the current market valuation of Northwest is about $50 million. This reflects the desperate cash position of the Company; I think that if Northwest had enough cash to fund the conduct of its clinical trials, that the market capitalization could be $500 million or more. However, the Company is in a precarious cash position and the needed capital raises could result in devastating dilution to shareholders.

Brief Review of Data on DCVax-L

Extensive prior studies have established that median progression free survival for standard of care is 6 to 8 months. If this is the case in this phase 3 trial, the trial would be successful if median progression free survival for DCVax-L was 10 to 12 months. See Northwest Biotherapeutics: A Comprehensive Evaluation of Its Lead Product DCVax-L for a detailed discussion.

In small phase 1/2 trials, its median progression free survival with DCVax-L was 26 months. Also we have seen encouraging results in rapid progressors who were not eligible for enrollment in the phase 3 trial See Northwest Biotherapeutics: Promising New Data Was Just Presented on DCVax-L in Recurrent Glioblastoma Multiforme There are strong reasons to believe that the drug has a meaningful therapeutic effect. Linda Liau’s comments further support this point of view