Expert Financial Analysis and Reporting

• Immuno-oncology is one of the most exciting areas for cancer research and cancer vaccines should be considered as a promising research area within immuno-oncology.
• Cancer vaccines might have been expected to produce great investor interest, but a long string of clinical trial failures over the last decade has made investors cautious or skeptical.
• However, evidence is growing that strongly suggests that cancer vaccines have therapeutic effects that may lead to their having a meaningful role in cancer treatment.
• Northwest has two very interesting cancer vaccines in DCVax-L (in phase 3) and DCVax Direct (phase 1) whose potential has not yet been embraced by investors.
• Investor caution on Northwest also has been the result of bears questioning clinical data that has led to a major short selling effort against the stock.
• Clinical data and actions taken by regulators in the UK and Germany to grant early access to DCVax-L are beginning to undermine important parts of the bear thesis.

Investment Perspective on Immuno-Oncology

In order to gain perspective on the recent clinical data on DCVax Direct, I think that investors need to have an appreciation of what is going on in immuno-oncology which has emerged as one of the hottest areas of research on the planet. The goal of immuno-oncology is to bolster the ability of the natural immune system to control or eradicate cancer. This has the potential to add a new paradigm to cancer treatment beyond radiation, chemotherapy and targeted medicines (like monoclonal antibodies).

Exciting clinical data from checkpoint modulator drugs like Bristol-Myers Squibb’s (BMY) Yervoy and Opdivo and Merck’s (MRK) Keytruda have been the catalyst for excitement about immuno-oncology from investigators and investors. However, there are other promising ways of bolstering the immune response. I can’t list all of the approaches but products based on the technology of engineered T-cells have burst on the scene and have caused significant investor enthusiasm. Cancer vaccines in my opinion are as interesting, but have generated limited investor excitement.

I have done extensive work on dendritic cell cancer vaccines and believe that they may also have a major role to play in immuno-oncology. Northwest Biotherapeutics (NWBO) is, of course, a leading player in dendritic cell cancer vaccines with DCVax-L and DCVax Direct. However, a large number of clinical trial failures over the last decade using different cancer vaccine technologies have caused investors to be skeptical that any cancer vaccine will work and this skepticism obviously extends to dendritic cell cancer vaccines. And yet, there has already been one dendritic cell cancer vaccine approved; this was Dendreon’s (DNDN) Provenge which could reach $300 million of sales in 2014.

Analyzing a Poster on DCVax Direct Recently Presented at the Society of Immunotherapy Conference (SITC)

The main reason for writing this article is to comment on a poster presented on DCVax Direct at the recent SITC meeting held from November 5 through 8. Twelve co-authors (investigators) from M.D. Anderson and the UCLA medical center offered some encouraging conclusions on DCVax Direct based on interim data from the phase 1 trial. Investors should recognize that this is early data and initial interpretations could change as the data matures. Still, this poster provides expert third party confirmation and validation of data previously released by Northwest Biotherapeutics.

The great challenge for all immuno-oncology drugs is that tumors can evolve mechanisms that enable them to block or escape the immune response. One of the major arguments against cancer vaccines has been that they can’t overcome the immuno-suppressive effects of tumors in order to create an immune response. Importantly, the authors of this poster concluded that DCVax Direct may be able to overcome the ability of the tumor to block the immune response and make the tumor susceptible to the immune system. Imaging scans and biopsies, according to the authors, show that DCVax Direct causes infiltration of immune cells into the tumor which indicates that it is stimulating an immune response against the cancer.

They further concluded that DCVax Direct is causing tumor cells to die and noted that some biopsies actually showed no live tumor cells. They also stated that injections into one local tumor mass (as was the protocol in this trial) were able to have an effect not only at the site of injection but also on metastases. This indicates that DCVax Direct is causing a strong immune response that results in systemic effects against the tumor. This is very important.

The poster focused on the clinical results of two patients, one with sarcoma and one with ovarian cancer. Sarcomas are tumors that affect bone, cartilage, fat, muscle, vascular, or hematopoietic tissues. Those sarcomas that are confined to a particular area such as a leg or arm bone can be treated with surgery and chemotherapy, but in metastasized, inoperable tumors such as was the case with this patient, there is no effective therapy. Metastasized ovarian cancers and sarcomas are very aggressive cancers with no effective treatment options.

For the sarcoma patient, imaging scans showed substantial tumor cell death at 8, 16 and 20 weeks of treatment. A biopsy taken at 8 weeks confirmed tumor cell death and infiltration of immune cells into the tumor. The authors also highlighted that there was an even division of CD4+ T-cells and CD8+ T-cells which they noted was a favorable prognostic marker indicating that the tumor responded to treatment. This indicates that DCVax Direct had a meaningful clinical effect on this very aggressive tumor that was unresponsive to other treatment options

For the ovarian patient, an imaging scan at 16 weeks as compared to 8 weeks showed that two lesions were meaningfully reduced in size. However, a new lesion appeared at 16 weeks that was not detected at 8 weeks. There are two possible explanations. The first is that the cancer was progressing in this area of the ovaries while responding in other areas. The second explanation is that this lesion was previously undetected by imaging and that the enlargement at week 16 was the result of tumor cell death and infiltration. A biopsy at week eight showed substantial immune cell infiltration and an increase in CD4+ cells as compared to CD8+ cells which are an indication that the tumor was responding favorably to treatment.

There are different perspectives in assessing the outcomes of clinical trials. Patients and physicians are looking for an effect on the tumor. They want to see evidence of tumor cell death and shrinkage of the tumor which is suggestive of survival benefits. Scientists want to understand what the drug is doing in the body that leads to these clinical benefits. They want to understand the mechanism of action. The importance of this poster is that it gives a meaningful insight into how clinical results and scientific results correlate in these two patients.

In the sarcoma patient, the patients and physicians were encouraged by the large holes or areas of tumor necrosis that were shown by both imaging scans and biopsies. In the ovarian patient, the tumor lesion that was injected shrank as did a distant lesion that was not injected which indicates a systemic effect. The appearance of the third new lesion confounds the interpretation somewhat.

The immunological or scientific data showed a significant immune response for both patients. It suggested that more than just creating a T-cell response; there is evidence that there is a broad immune response involving both the innate and the adaptive immune system, both of which are necessary to overcome tumor immuno-suppression. There seem to be other cells of the myeloid lineage involved other than dendritic cells, like macrophages of the innate immune system that are involved in the drug response. The effect of the DCVax Direct appears to go beyond inducing just a T-cell adaptive immune response. This is important information as scientists begin to put together a hypothesis for mechanism of action.

There was no data in this poster on any of the other 34 patients who have been enrolled in the trial which I would like to have seen. However, the conclusions on the ability of DCVax Direct to overcome tumor immuno-suppressive effects and create a systemic effect were almost certainly influenced by what investigators were seeing in other patients. I would also have liked to have seen anecdotal comments on the impact on quality of life in these to patients. I am sure that we will learn of these factors in future reports.

Weaving Interpretation of this Poster in with Other Clinical Data on DCVax Direct

For me, this poster is supportive of other data that we have seen about DCVax Direct, particularly data presented by Northwest Biotherapeutics on June 11, 2014. At that time, the Company reported that 9 out of 9 patients who had received 4 of the 6 planned injections were showing positive effects. (The fourth injection occurs at eight weeks.) This included tumor cell death, tumor shrinkage, and substantial immune cell accumulation in their tumors and/or stabilization. The Company also reported similar observations in four of thirteen patients who had received three or fewer injections. (The third injection occurs at two weeks.) Altogether there are six injections over 32 weeks.

Biopsies taken in 3 of the 9 patients given four injections showed no live tumor cells in the tumor that was injected. These thee cases included diverse, advanced and particularly aggressive cancers:  one metastatic pancreatic cancer case (Alan Butler), one metastatic colon cancer case and one metastatic sarcoma case. I think that the conclusions reached by the co-authors of the SITC poster were dependent on data like this from a broader number of patients. Importantly, I think that the SITC poster validates the data presented by Northwest in the June 11^th press release.

For me, the anecdotal report on Alan Butler is one of the more informative data points about DCVax Direct. Mr. Butler was the first patient treated with DCVax Direct. He appeared in a National Geographic special on cancer treatments earlier this year to tell his story. Mr. Butler was suffering from stage 4 pancreatic cancer and his doctors concluded that he could not tolerate any more chemotherapy. He had no other therapeutic options and his life expectancy was a matter of months. You can read about his story in a report I wrote on September 8, 2014. Mr. Butler staged a remarkable recovery after DCVax therapy and has returned to work.

How I View the Developing Clinical Profile on DCVax Direct

I believe that the data I just discussed provides strong evidence that the conventional wisdom that cancer vaccines can’t overcome the immuno-suppressive effects of tumors is incorrect. I think that both drug researchers and investors have to conclude that there is a positive biologic effect on killing cancer cells through the creation of an enhanced immune response against cancers. We can infer that this will translate into an important clinical effect and the experience of Alan Butler with his pancreatic cancer is very encouraging. However, at this early time we can’t accurately assess the clinical benefit of DCVax Direct or its duration of effect.

The data so far has been generated in some very advanced and difficult to treat cancers such as metastatic pancreatic, colorectal and ovarian cancers and sarcomas. The common belief among investigators is that immuno-oncology drugs should produce better effects in less advanced cancers in which patients have stronger immune systems. In fact, the phase 1 trial was designed just to determine safety and feasibility of injecting DCVax directly into tumors. The signals of efficacy were not necessarily expected.

It is encouraging that positive effects are seen in several solid tumor types. This is consistent with the presumed mechanism of action in which DCVax Direct is injected into the tumor and picks up antigens that are specific to that tumor. It is not dependent on affecting one or a few mutations within the tumor as is the case with targeted therapies; it is a broad spectrum drug potentially active against most (all) solid tumors. The mode of action of the drug also brings out an interesting hypothesis. Each time an injection is made the drug picks up the antigens that are specific to the tumor. As the tumor evolves, DCVax Direct evolves with it. This could potentially overcome resistance issues that plague virtually all cancer drugs.

Investors focus on efficacy in evaluating new cancer drugs, but I think that one of the truly differentiating features of DCVax Direct is how safe it is. So far, it has shown none of the debilitating or even life threatening side effects caused by most cancer drugs and radiation. So far, it has displayed a relatively benign side effect profile characterized by mild fevers and modest injection site reactions. The mild fevers are consistent with the immune response and can be handled with Tylenol. This benign side effect profile is one of the most compelling aspects of the drug. This should speed regulatory decisions on the drug and, if approved, will encourage quick uptake.

Before investors start doing victory laps, I want to point out some issues that necessitate investor caution. DCVax Direct is in its first phase 1 human trial that involves 36 patients. We are at a very early stage of development and there is much to learn. Investors have only seen a sprinkling of data in a small number of these patients. We don’t know the types of solid tumors that may (best) respond to DCVax Direct and the clinical importance of their response. We also don’t have a good idea on whether the effects are durable. Even with the release of more comprehensive data on all patients in the trial, which could be in 1Q, 2015, we will still have many questions and uncertainties. That said, I think investors have to be encouraged with the results seen so far.

Where Do We Go From Here with Clinical Trials?

On July 16^th, the Company reported that all 36 patients had been enrolled in the phase 1 trial. This indicates that the sixth and final injection of the 36^th patient treated will occur approximately on March 16, 2015.

The Company already has FDA permission to seamlessly transition into a phase 2 trial that will enroll an additional 24 patients. The Company has not specifically discussed plans for the phase 2 trial. The original plan was to enroll 12 colorectal patients in the phase 1 trial and if the results were encouraging, the phase 2 trial would focus on colorectal cancer patients. Northwest has not updated their thinking on this. However, the results seen in the sarcoma patient might alter their thinking.

Sarcomas are aggressive and there is no effective therapy. A successful trial in just a handful of sarcoma patients in phase 2 might lead to regulatory approval. This could tempt management to go for this indication. I understand that there are other sarcoma patients in the phase 1 trial so that this might inform the Company on whether to include sarcoma patients in a phase 2 trial. My judgment is that the phase 2 will use one dose level of cells, and will inject multiple lesions at each time of injection instead of just one. This trial will not have to wait for the conclusion of phase 1 and could start in 1Q, 2015.

Enrollment occurs after screening and manufacturing have been completed. In the early stages of the phase 1 trial, the protocol required that each patient treated would receive two injections. Then the investigators would have to wait 2 to 3 weeks before enrolling the next patient. This is a typical safety precaution in a first in human trial. This initially slowed enrollment but in March, 2014 those restrictions were lifted and the remainder of the 36 patients enrolled much more quickly.

Future trials should also enroll quickly. Inoperable cancer patients are without any approved therapeutic options and are desperate for a treatment that may help. Also, the side effects of this treatment are minimal. This is unlike in chemotherapy where the side effects can so severely effect quality of life that the patient may opt to not undergo treatment.

Important Investment Aspects of the DCVax Direct Poster

One of the most important aspects of the SITC poster is to take some of the underpinnings away from the bear argument on Northwest Biotherapeutics. This tiny company has been the subject of an intensive short selling campaign. Over the last 12 months the short interest has grown from 2.3 million to 8.3 million. Some of the arguments that are central to the bear case are greatly damaged by points made in this poster presentation.

When earlier interim data from the trial was presented by the Company on June 11, 2014 2014, one prominent bear claimed that this was somehow unethical and exploited cancer patients. I found the argument strange at the time. In open label phase 1 and 2 trials, companies routinely report interim results. Still, this argument gained traction and had a major impact on the stock. I think that this was because the data came directly from the Company and bears presented it as promotional and misleading. However, the presentation of interim data by the M.D, Anderson and UCLA effectively decimates this argument as they are comfortable with releasing interim data.

Moving on, the bears argued that when Northwest released interim data, it created a rift with M.D, Anderson. The innuendo was that M.D. Anderson did not feel that this interim data should be released. However, M.D. Anderson doctors have associated themselves with an interim data release in this poster and this shows that they are very supportive of the DCVax Direct trial; there is no basis to suggest that there is a rift.

This bear argument also triggered a number of attempts by law firms to begin a class action against Northwest based on the allegations of management misconduct, i.e. that the Company released misleading interim data and was rebuked by M.D. Anderson. I think we have probably seen the last of these attempts to create class action suits based on these specious arguments.

Valuation Discussion

One of the hardest things about investing in emerging biotechnology stocks whose prospects are based on products still in the clinic is the discussion on valuation. The technique most often used by Wall Street analysts is to make projections on the timing of introduction and long term projections on sales and earnings of products, often 10 or more years into the future. A discount rate is then assigned along with a judgment on the probability of successful development of the drug and a net present value is calculated. While this gives the appearance of mathematical rigor, in reality it is just a matter of garbage in, garbage out. I find this approach to be worthless.

I think that beginning the valuation discussion by comparison with peer companies is a better approach, although it also has substantial problems. Emerging biotechnology companies are generally so different that it is hard to find good peer companies. I also think that a major force behind price movement of emerging biotechnology companies has many similarities to a commodity. There is no solid method of calculating the intrinsic value. The most recent price is set by a balance of positive and negative perceptions so that price movements occur as the balance changes. So my approach is based somewhat on finding something close to a peer company to get some sense of intrinsic valuation and then looking at how perceptions on the stock may change. You may scoff at this intuitive approach, but I have found nothing better.

If you want to skip the rest of my valuation discussion I understand; if not, bear with me. As a peer company to Northwest, I have chosen Kite Pharmaceuticals (KITE). Both are involved in immuno-oncology. Kite is the first company to come public (last June) based on an engineered T-cell technology platform. This technology has caught the attention of Wall Street. Let me go through some fundamental aspects of Kite.

Kite obtained its technology from the National Cancer Institute. It has one lead product and all of the data on that product was created at NCI. Kite is planning its first trial in 1Q, 2015. The indication is for a form of Non-Hodgkin’s lymphoma called diffuse B cell lymphoma or DLBCL. The trial is based on results in 7 evaluable patients with chemotherapy-refractory DLBCL. In this group there were four complete responses and two partial responses. Of the patients who achieved a complete response, three have had duration of response from 9 to 22 months.

Third line DLBCL patients like these are generally only given palliative care or sent to hospice. It is estimated that they have a median survival of about 6 months. This is a living cell product which means that the manufacturing process is the product. The NCI process is not satisfactory for clinical trials or commercialization so that Kite will have to develop a new manufacturing process. This creates the not insignificant risk that the product manufactured by Kite could be materially different from that used by NCI in its clinical trials or that it cannot be produced in sufficient quantities for the upcoming clinical trial.

If you compare Northwest to Kite, I think that Northwest compares very favorably. The phase 1/2 data on the use of DCVax-L in newly diagnosed glioblastoma patients is every bit as compelling as the NCI data in DLBCL. DCVax-L is involved in a pivotal phase 3 trial that will report out results in 2H, 2015. It also received the major validation of being selected for the German hospital exemption early access program. Moreover, NWBO has DCVax Direct as a second part of its portfolio.

Kite has a much better financial position as it raised gross proceeds of $146 million in its public offering and is in the process of raising up to an additional $138 million; it has a solid cash position. KITE also has not been the target of a concerted short selling effort which in the case of Northwest has hindered efforts to raise capital. The one significant disadvantage for NWBO is that it has a weak cash position and will need to raise perhaps $50+ million over the next year.

I make these comparisons to make the point that the current market capitalization of an emerging biotechnology company can sometimes be wildly out of line with its peers. I would argue that the investment fundamentals of Northwest are at least as good as Kite’s and in my opinion are better. Kite has a current capitalization of $1.6 billion and Northwest has $500 million. I think that this means that if the fundamentals of NWBO become as well recognized and appreciated by investors, as is the case with Kite, that there is very significant upside.

Tagged as Northwest Biotherapeutics Inc. + Categorized as Company Reports, Smith On Stocks Blog