Expert Financial Analysis and Reporting

Purpose of Report

This report goes over recent news on the company in regard to DCVax Direct and DCVax-L and then goes into the issues that have affected the stock this year and upcoming events that will determine the stock price in the balance of the year. NWBO may have turned a corner and gained the high ground against an intense shorting program directed at the stock. I continue with my buy on the stock.

Press Release on Interim Results of Phase 1/2 Trial of DCVax Direct

NWBO provided additional information on its phase 1/2 trial of DCVax Direct in solid inoperable tumors in a press release on June 11^th. It reported that 20 patients have received at least three injections of DCVax Direct. The protocol for the trial calls for injections at day 0, one week, two weeks, 8 weeks, 16 weeks and 32 weeks. These 20 patients have received at least three injections over two weeks.

This is a first in human trial of DCVax-Direct trial that is composed of a Phase I trial that will enroll 36 patients using the injection cycle just described. After completion of the phase 1 trial or possibly before (they may not wait for full evaluation of the last patients enrolled), the trial will roll seamlessly into a Phase 2 trial of 24 patients using the same injection cycle. Altogether, there will be 60 patients in the combined trials. This is an unusually large patient enrollment for a first-in-human trial. Ordinarily, such trials involve 12 to 18 patients. This protocol was approved by the FDA probably because of the striking animal data and the strong safety profile seen with other dendritic cell cancer vaccines,

The Company highlighted that nine out of nine patients who had received four injections over an 8 week period showed signs of tumor cell death, tumor shrinkage, and substantial immune cell accumulation in their tumors and/or stabilization (no progression) of their cancer. It seems indisputable that we are seeing a biological effect that we would expect with an immune therapy as immune cells are being attracted to the tumor and are attacking cancer cells. Seeing this in a short period of just 8 weeks is encouraging and seeing this effect in so many patients (percentage wise) is striking.

The effect on the size of the tumors shows a range from shrinkage to stabilization to enlargement (in three cases I think). In currently used chemotherapy and targeted therapy, the objective is to shrink the tumor as much as possible and hopefully eliminate it. However, preventing progression of the tumor is also considered to be of therapeutic benefit, especially in advanced cancers. I would also note that we saw in the case of the two immunotherapies that have been approved, Yervoy and Provenge that initially the size of the tumors may increase before shrinking as immune cells collecting in the tumor cause an inflammatory effect as they attack the tumor.

The questions that remain to be answered are whether these effects will be durable. If this effect just occurs for two or a few months and then fades, it is unlikely that it would have a meaningful clinical benefit. We will also be watching to see if the biological effect increases over time as has generally been found in some patients treated with Yervoy and Provenge. We will want to know what the clinical benefit is, i.e. does it slow or reverse the progression of the disease and what effect does it have on quality of life?

The Company was very much encouraged that no live tumor cells were detected and immune cells were found in biopsies of three advanced and aggressive cancers; one metastatic pancreatic, one metastatic colon cancer and one metastatic sarcoma. It is important to understand that this trial is being conducted in patients with very aggressive or bad tumors for which there are no approved therapies. These three cancers are the “baddest” of the bad. The severity of the disease in these patients makes the results even more noteworthy. The shrinkage in one of these patients (I believe it is the sarcoma patient) has been reported to be 28% which is just short of a partial response by RECIST criteria.

The questions that I have on these three patients are the ones I just articulated above. In addition and very importantly, I would like to know if there was any effect in distant metastases which were not injected. In a previous press release on the sarcoma patient, NWBO did report biological activity in one distant metastases. The Company also noted that these patients were treated at the lowest dose level of 2 million cells per injection. In normal drugs, generally more of the drug (or in this case more cells) generally produce a better effect. This is called a dose effect. However, I have seen in other immune therapies that there is no dose effect.

The main focus of the Phase 1 portion of the trial is on safety, but indications of efficacy can also be seen. In terms of safety, the drug is extremely well-tolerated. The main side effect being seen is fever at the time of injection that lasts for a day or two. This is a result of the biological effect of the drug, which causes an immune response. This can be treated with Tylenol. There has been one case of mild nausea reported, but investigators believe that this was caused by another drug being taken by the patient. There is pain upon injection of the needle that is comparable to that of a biopsy that can be treated with a local anesthetic. Relative to chemotherapy, the side effect profile is benign; this is an extremely important aspect of the drug.

Updating Status of Phase 3 Trial of DCVax-L in Germany

In a press release on June 10^th, NWBO announced that it initiated the Phase 3 trial of DCVax-L in Germany.  The first site to open in Germany was a medical center in Dresden, which was initiated in late May.  The Company has now scheduled the full-day site initiations for 3 more sites during June and 4 further sites in July. To date, the trial has been enrolling in parallel in the US and in the UK, The first German site is now starting to screen patients for purposes of enrollment, and the additional German sites will begin doing so following their scheduled initiations.

Some of my subscribers have asked how patient enrollment will be handled between the phase 3 trial in Germany and the patients treated under the hospital exemption early access program. Will there be enough patients for each?

Germany has a population of about 82 million which is nearly 25% of the US population. The incidence of glioblastoma in the German population is believed to be the same as in the US. Using the common estimate that there are 12,000 newly diagnosed glioblastomas per year in the US, this implies that there are about 3,000 in Germany. Probably no more than 50 or so patients will find their way into the phase 3 trial.

Another point to consider is that the hospital exemption approval is for all gliomas (brain tumors) both newly diagnosed and recurrent. The phase 3 trial is being conducted in newly diagnosed glioblastoma multiforme (the most aggressive form of brain cancer). The target population for which the hospital exemption applies is much larger than for the population that is eligible for phase 3.

Battle of the Short Sellers against the Longs

Since the beginning of the year, NWBO has been the subject of significant shorting activity. The battle of the shorts against the longs can be seen by looking at the rise in stock sold short that is provided by NASDAQ and the price action. On December 31, 2013 there were 3.4 million shares that were short and the price closed at $3.77. By February 28, 2014 the short interest was 4.6 million and the price closed at $7.09. By May 30, 2014 the short interest 6.7 million and the stock closed at $5.98. The closing price yesterday, June 11, was $6.41.

The shorts seem to have had a significant impact on the stock since March. The stock price is flat despite the very positive announcement of the approval of DCVax-L in Germany for the treatment of all gliomas (brain tumor) under the German hospital exemption early access program. This approval for five years goes far beyond the disease target for the phase 3 trial that is glioblastoma multiforme, the most aggressive form of brain cancer. DCVax-L is also eligible for reimbursement in Germany comparable to drugs that have gone through the traditional approval process. This was the first such approval for any systemic drug under this program since it was implemented in 2011. This is a really big deal. In addition to the German approval of DCVax-L, NWBO has released some very interesting early data on DCVax Direct as discussed earlier.

The bears have attacked NWBO on its decision to give updates on its phase 1/2 trial of DCVax Direct in inoperable solid tumors as the trial progresses. I have seen short sellers try to negate the encouraging data that has been shown with specious arguments. The most laughable argument was that the tumor necrosis that has been seen was the result of sticking the syringe carrying DCVax Direct into the tumor mass.

The bears have also implied that releasing data as the trial progresses that NWBO is somehow acting unethically or doing something wrong. This is another specious argument. The phase 1/2 trial is open label which means that results are known to investigators and the Company as they occur. This differs from blinded trials that are done at the phase 2 or phase 3 level in which the results are not known until the trial is completed. All companies look at the phase 1 data as it occurs. Some choose like NWBO to report data as it occurs and others wait until the trial is completed. I see this as transparency on NWBO’s part.

The bears have relied very heavily on one argument to cast doubt on DCVax-L and its phase 3 trial. In late February, CEO Linda Powers said that the interim analysis for safety and efficacy was pending. On March 7, the data safety and monitoring board (DSMB) said that the safety analysis had been completed and that the trial should continue, but no mention was made of the efficacy analysis. The bears jumped on this and built a straw man case that included allegations that NWBO had seen the data, that it was bad and that it was withholding release of the data to prevent a stock price collapse. This argument is ridiculous as NWBO is blinded to the data, the DSMB has control of the interim analysis, not NWBO, and NWBO would have a regulatory obligation to release the data if it had it.

So why hasn’t the efficacy analysis been completed? I think the most logical conclusion is that no efficacy analysis has yet been performed.

Certainly, if NWBO knew that an efficacy analysis had been done, they would have been required to let shareholders know as Linda Powers had made it a material issue with her statement that the efficacy analysis was pending. Ms. Powers received a J.D. degree, magna cum laude, from Harvard Law School. She also received a B.A. in Economics from Woodrow Wilson School, Princeton University, where Ms. Powers graduated magna cum laude and Phi Beta Kappa. She is certainly aware of the extremely serious issue of withholding and not immediately releasing material information to the public.

So what could be the reason for not yet doing the efficacy analysis? The one extraneous variable in all of this is that Ms. Powers said that the Company has built into the clinical trial protocol the provision that the trial size can be expanded. If the Company decides to exercise this option, the last thing that they would want would be to have an efficacy analysis performed prior. Even though NWBO would be blinded to the data the regulatory agencies could still presume some type of bias could have come from the interim efficacy analysis. It might also be the case that the enlargement of the trial cannot just be done by fiat. The regulators (in this case the US, UK and German) have to sign off and as we all know they are not inclined to move at lightning speed.

From my own viewpoint, it is almost impossible to conceive of this trial being halted for futility or lack of efficacy given that there is no safety issue and all patients receive standard of care (SOC). I think that halting the trial for efficacy also has almost no chance to occur. This is a potentially paradigm changing therapy and we want to learn as much as possible about sub-groups in the trial. Because, there is a cross over possibility for non-responders there is no ethical issue if the trial continues even if it looks like it is already successful.

This "where is the efficacy analysis" canard has blunted the very positive announcements I have discusses previously. I suspect that this matter will be put to rest in a matter of days, weeks or a month or two and the outcome will simply be that the efficacy analysis has been completed and the trial will continue with no information on whether the drug is or is not effective.

Upcoming Events Could Have a Major Impact on the Stock

I think that there are a number of upcoming catalysts for the stock in the coming months. I think we could hear that patients are being enrolled in the German hospital exemption early access program and there will be an announcement on the reimbursement price. This will lead to a revenue line on the income statement. Over time, investors will watch the number of patients being enrolled very closely.

There is a comparable program for DCVax-L in the UK in which patients with gliomas (not just glioblastoma multiforme) can receive treatment. Differing from Germany, there is no government reimbursement, but there is private pay that can lead to revenues. The Company has been very silent on the UK until Germany is up and running, but this could change.

If I am correct that the delay in announcing the interim efficacy analysis is due to an enlargement of the enrollment of the trial, the clarification of this issue takes away the major bear argument that has held the stock back. The degree to which this will be true will depend on the number of patients to be added and the reason for doing so. If the trial is enlarged by say 50 patients and there is a good reason for doing so, it could be a major catalyst. If the trial is enlarged by something like 150 patients it will be taken as a negative.

There will also be continuing information on the DCVAX Direct trial which I discussed in detail earlier in this note.

The bears have been ingenious in coming up with negative arguments to deflect positive announcements. However, if I am correct on the points above this will become increasingly more difficult. I think they will emphasize the enlargement of the trial size as being a negative and will attack the DCVax Direct results as being too early to give them credibility, but these are weak arguments. NWBO may have turned a corner and gained the high ground against an intense shorting program that has been directed at the stock.