Expert Financial Analysis and Reporting

• This is an updated version of a blog that was published on October 20^th.
• A Seeking Alpha article on results from a phase 2a trial of GM 640, a drug being developed by the privately held company Genervon, led to an unwarranted sharp decline in the price of Neuralstem.
• SA failed to understand that this was a randomized trial that compared 8 patients given drug versus 4 patients given placebo. There was no difference between the drug and placebo in clinical results as measured by the ALSFRS-r scale
• Instead SA reported that the trial demonstrated a disease modifying effect as ALSFRS-r score showed a statistically significant improvement against historical controls. This is highly misleading.
• Based on the clinical results shown in the phase 2a trial, we can only conclude that GM 640 is safe. No conclusions can be drawn on efficacy.
• The Seeking Alpha article triggered a round of short selling that is unwarranted based on the equivocal GM640 data. It represents a buying opportunity.

Reason for Plunge in Neuralstem Stock

Neuralstem plunged from a closing price of $3.05 on October 17^th to an intraday low of $2.12 on the next trading October 20^th, a decline of 30%, and is currently trading at $2.69. This occurred on a very strong day for the market and one in which most small biotechnology companies did well so the decline was not attributable to weakness in peer companies. Also, Neuralstem did not release any information that could account for the decline. The only news that I could find that could account for the weakness was an article published on Seeking Alpha

The SA article summarized a press release put out by Genervon, a private company located in Pasadena, California. The SA article emphasized that Genervon’s lead drug GM604 “showed encouraging disease-modifying results albeit in a small number of patients. In the ALS study, GM604 significantly reduced the decline in ALSFRS-R versus the historical control (p=0.0047). Seven of eight patients had their ALS disease progression slowed or stopped at week 12 after six doses of GM604. Five of seven treated patients had their forced air capacity (FVC) disease progression slowed or reversed at week 12 compared to historical placebo (-11.5% compared to -4.7% after treatment).” This SA article triggered off some significant short selling which I will discuss later.

Taking a Closer Look at the ALSFRS-r Data

Based on SA’s reporting of the data, it would appear that this was a stunning effect in a small group of ALS patients. However, a closer examination leads to a totally different interpretation. The data came from a phase 2a randomized, placebo-controlled clinical trial for the drug GM604 in ALS.  The was a very small trial in which the drug was given for just two weeks and patients were then observed for ten weeks. It enrolled 8 people on drug and 4 on placebo. A successful ALS drug must show effects over a year or more so that short term results must be viewed with caution. Also, the data was aggregated so that we can’t see individual results. Without knowledge of the baseline patient characteristics and end point characteristics for individual patients and aggregated data it is impossible to interpret this data beyond accepting what the company has stated.

The claim for a statistically significant improvement in ALSFRS-r upon closer look also is not justifiable based on the data. For background, the ALSFRS-r scale is essentially made up of 12 different factors that determine quality of life for an ALS patient. Each of these is evaluated on a scale of 1 to 4 by the patient or the physician to determine the final score. A normal person would score 48 on this scale; ALS patients usually present with a score of 35 to 40 and show a steady deterioration over three to five years and ultimately die when the score is in the 15 to 20 range,

In clinical trials, the decline in ALSFRS-r for ALS patients given drug versus those given placebo has been the accepted (required) primary endpoint. Recently there have been two large trials in ALS involving Biogen’s dexpramipexole and Cytokinetic’s tirasemtiv. Neither drug was successful in showing a statistically significant improvement in ALSFRS-r in large randomized trials involving several hundred patients. Hence a statistically significant improvement in a 12 patient randomized trial would be stunning.

Unfortunately, the reported improvement in ALSFRS-r is misleading. The results for the eight patients treated were not compared to the four patients on placebo. Apparently, the four placebo patients did as well or better or only slightly worse on the ALSFRS-r scale than the eight patients on GM640. Faced with this disappointing result, Genervon decided to compare GM604 to historical results that were observed in ALS patients treated with placebo in other clinical trials. Here it found a difference. There are lots of issues in choosing to look at historical results as placebo patient results can differ from study to study depending on patient characteristics. It is possible to pick and choose results that one is looking for. My interpretation of the ALSFRS-r data, and one that I think almost anyone else would reach, is that there is no difference between GM604 and placebo in this trial based on the results shown in this study.

Genervon also reported that that forced vital capacity results at 12 weeks. This is the amount of air that can be slowly exhaled after a deep breath. It is the most widely used and relied upon measure of breathing function. ALS patients know their FVC scores like most people know their social security numbers. Survival of ALS patients is closely correlated with FVC and it is used for decision making on whether to put a patient on ventilatory assistance, to surgically intervene or to decide to put a patient in hospice. Genervon reported that FVC at week 12 declined by 11.5% versus 4.7%; this was not statistically significant but it is an interesting observation. Given the very small sample sizes, this may have occurred by chance.

I Can’t Understand Why Seeking Alpha Published This Article

It is a bit strange that SA would write an article on a private company as their articles almost exclusively deal with publicly traded companies. Incidentally, this article was published by an employee of Seeking Alpha, not an external contributing author. So it would appear that the intent was to get page hits on Neuralstem by putting out this article. I would also note that since earlier this year when it was discovered that investor relations firms were paying authors to write positive articles that SA has begun to emphasize bearish articles. SA is all about page hits and it is clear that there would be no page hits for an article on Genervon. However, SA linked the article so that the 4700 people who receive alerts on Neuralstem would also receive the article.

Is There a Hedge Fund Angle?

I spoke with some traders familiar with Neuralstem’s trading. They seemed to feel the weakness may have been the results of hedge fund action. Apparently, at the opening on October 20^th several blocks were advertised for sale involving several hundred thousand shares. A trader holding a large position that he was looking to sell would not have advertised these blocks. They would advertise perhaps 10,000 shares for sale and when that was sold would then sell another 10,000. It is more likely that a trader already short the stock and hoping for a decline would advertise such a large block. However, this is just speculation on my part. We will be able to determine shortly if the volume seen on October 20 was largely short selling.

As I noted earlier, it is very unusual that Seeking Alpha would choose to write an article on a privately owned company or even be aware of the press release. SA does have a tip line and I wonder if some short seller tipped them to this press release in the hope that they would write an article as indeed was the case. I doubt that we will ever know.

Investment Conclusions

There is no credible reason why the Genervon press releases should have an effect on the price of Neuralstem for reasons I have just explained. I view this as a buying opportunity. The next critical data point for Neuralstem will be the final results on the phase 2 trial of its NSI-566 neural stem cells in ALS patients. Investigators in the study have indicated that they are seeing favorable results in this open label trial, but there has been no interim analysis and there probably won’t be one. The data will be locked in January and topline results announced shortly thereafter.

I spoke with Genervon and I intend to do more work on GM604. Apparently, the drug has been around for over 15 years. It has a very novel mechanism of action that interests me. I think that the Company will need to do a phase 2b proof of concept trial for this drug as the phase 2a trial really only demonstrated safety. I would guess that it would take perhaps two years to do a meaningful phase 2b trial involving 200 or more patients; I am unclear as to whether the Company has the finances to do conduct such a trial and when the trial might be started, Hence, we are not likely to hear of any clinical results for perhaps two or more years. I think this issue will quickly fade from the attention of investors evaluating Neuralstem.