Expert Financial Analysis and Reporting

Report Overview

I usually start my reports with a summary and investment thesis. However, in this report I am putting this section at the end of the report. Northwest issued a press release on May 3 that gave an important operational update on the Company. The press release makes six distinct comments and in this report I have reproduced each of these as Northwest Biotherapeutics Comment 1, 2, 3, 4, 5 and 6. Following each comment I have added my thoughts and interpretation where appropriate as SOS point 1, 2 etc. I want you to read this section first in order to understand my investment thesis.

Analyzing Comments in the Press Release

Northwest Biotherapeutics Comment 1: The Company has reached conceptual agreement with three different sets of parties, in regard to three different combination treatments, for three different cancers in three different Phase II trials.  These involve leading participants in the immunotherapy field.  The Company and these parties are now completing the agreements and budgets, and pursuing regulatory approval for the agreed upon trials.

SOS Point 1: F-stein writing on TheStreet.com and anonymous hedge fund authors (who were short NWBO) writing on Seeking Alpha have produced a continual flow of scurrilous attack articles on Northwest. One of the points they repeatedly made was that no major pharmaceutical firms had any interest in NWBO’s therapeutic cancer vaccines. This specious argument is now debunked.

SOS Point 2: I think that Bristol-Myers would be a likely candidate for collaborating with NWBO as would Merck, Astra Zeneca, and Pfizer. It is also possible that academic centers could conduct trials. My June 15^th report  Observations from ASCO on Immuno-oncology with a Focus on Northwest Biotherapeutics’ and the Checkpoint Inhibitors of Bristol-Myers Squibb and Merck highlighted the interest of these companies, especially BMY, in combining their checkpoint modulators with therapeutic cancer vaccines.

SOS Point 3: I think that it is a virtual certainty that one and probably all of these trials will involve combinations of checkpoint modulators with DCVax-L. The UCLA Medical School has recently commented on seeing synergy between PD-1 inhibition (the mode of action of Opdivo and Keytruda) and DCVax-L in animal models. Agenus has shown data that indicates that survival of glioblastoma patients treated with their cancer vaccine Prophage was increased substantially when PDL-1 levels were lower making this ligand less available to interact with the PD-1 receptor and turn down the immune response. See my recent report Agenus: Its Market Leading Position in Immuno-Oncology Makes it A Compelling Investment Story Treating with a PD-1 inhibitor like Bristol-Myers Squibb’s Opdivo and Merck’s Keytruda would have the same effect of reducing the activation of the PD-1 receptor.

SOS Point 4: There was no comment on the design of the trials other than to say that there would be phase 2 trials in three different cancers. Keytruda and Opdivo are both approved in late stage melanoma and non-small cell lung cancer. It would seem possible that one or more of these phase 2 trials would be a randomized trial with one arm comprised of  DCVax-L combined with a checkpoint modulator and the other arm being the checkpoint modulator; the disease target would be late stage melanoma and/or non-small cell lung cancer. Also, Bristol-Myers is conducting a trial of Opdivo in relapsed glioblastoma (results have been mediocre) and I would think that combining DCVax-L with Opdivo to treat relapsed glioblastoma is a possibility. It is also possible that some of these phase 2 trials could be single arm trials in other late stage cancers.

SOS Point 5: Northwest did not give any indication on a possible regulatory filing strategy and whether they might be able to file for approval based on promising data from phase 2. F-stein, et al, have repeatedly stated that the FDA will only approve drugs on the basis of controlled trials in which the primary endpoint is overall survival. This is completely wrong. In a salvage setting the FDA will accept other end points if they are medically meaningful such as tumor shrinkage, progression free survival or even quality of life. Indeed, Keytruda was approved on the basis of a clinical trial without a control arm in which 41 of 173 patients (24%) with advanced melanoma saw their tumors shrink with a response lasting from 1.4 months to 8.5 months.

SOS Point 6: If these phase 2 combination trials are done in salvage settings like Keytruda as seems highly probable and if the results are positive, the Keytruda example strongly suggests that the FDA could grant accelerated approval on the basis of a single pivotal trial without a control arm. Keytruda was approved just three and one-half years after it was dosed in the first human patient. My guess is that the time between beginning enrollment and approval for a combination of DCVax-L and a checkpoint modulator would be less. Because the Keytruda trial was the first in humans it had to initially go slow to establish dosage and safety. Both dose and safety have already been established for DCVax-L and the checkpoint modulators so that the trials might enroll much more rapidly. I think that it is not out of the question that approval could come in two years or so after the first person is dosed if the results are positive.

SOS Point 7: Northwest is in a precarious cash position and it is not clear to me how these trials are going to be funded. I wonder if Northwest will have to foot the bill entirely which would be a huge strain on its already weak balance sheet or if the larger companies will contribute or if there could be an investigator funded trials funded by grants. I eagerly await more information on this funding issue.

SOS Point 8: Northwest at one time had given indications that these combination trials could start in 2H, 2015. However, plans seem to have been put on hold pending resolution of the screening halt on DCVax-L in the phase 3 trial in newly diagnosed glioblastoma. It seem possible that this situation had to be resolved before starting these trials and perhaps the announcement of the planning of these three trials is a signal that this issue is nearing resolution.

Northwest Biotherapeutics Comment 2:  The Company is establishing a Scientific Advisory Board (“SAB”).  The Company has reached agreement with the initial members of the SAB, including leading experts in immunotherapy and oncology from both the US and Europe.  The initial members are in the process of completing their internal institutional approvals.

SOS Point 1: This goes to the issue of credibility and validation of the technology. I look forward to seeing who the members are. Certainly, the involvement of influential key opinion leaders could build confidence with investors and create greater interest in the scientific community.

Northwest Biotherapeutics Comment 3:  The Company has received updated data from the ongoing follow-up of patients in the Phase 1 portion of the DCVax-Direct trial.  To date, 20 of the 40 patients have exceeded 12 months overall survival (“OS”), 13 of the 40 patients exceed 18 months OS, at least 10 of those 13 patients (with 2 of the 13 currently unknown) are still alive at OS times up to 29 months to date, with the majority having exceeded 20 months.

SOS Point 1: These patients each had inoperable tumors and had exhausted all available therapies. In general, I would think that survival for these patients would be a matter of months. For example, a friend of mine with colorectal cancer had exhausted his treatment options and the tumor had spread and was inoperable. He died within four months of ending his last treatment option. This is typical of the type of patients put on DCVax Direct. Obviously, survival will vary from patient to patient and cancer to cancer and this experience may not be typical. As another example, you might want to read the experience of a pancreatic cancer patient who was given DCVax in my report Direct National Geographic Special Features DCVax Direct Treatment of Stage 4 Pancreatic Cancer Patient

SOS Point 2: You may recall that I just said that Keytruda was approved on the basis of tumor shrinkage in just 24% of patients and with no survival data. If we could accept that most of the patients treated with DCVax Direct were like my friend and had only a few months to live, the survival data would be staggering. Unfortunately, the number of patients treated is small at 40 and there were 13 different tumor types. Also dosing in terms of cells and number of injections varied substantially. This makes it difficult to determine if these survival results are as profound as they seem.

SOS Point 3: It would be a positive if these results were published in a major medical journal or presented at a major conference.

Northwest Biotherapeutics Comment 4: The Company has undertaken extensive analyses of data from the Phase 1 portion of the Phase 1/2 trial of DCVax-Direct for all types of inoperable solid tumors.  The Phase 1 portion of the study involved 3 different dose levels, 2 different product formulations, 13 different cancers, several modes of image guidance for treatment administration and multiple measures related to immune system activation.  Analyses of this data have found some novel, unexpected and encouraging results that are of significance for further trials.  Also, the Company and physician advisors have completed clinical analyses and preparations for injection of multiple tumors in multiple different tissue locations (going well beyond what any other known trial has undertaken), as well as a greater number of treatment cycles, for the upcoming Phase 2 portion of the trial.  In addition, the Company and its manufacturer, Cognate BioServices, Inc. have completed a lengthy program of development work to further optimize the DCVax-Direct investigational product.

SOS Point 1: This information should be essential in designing a phase 2 trial.

SOS Point 2: Going back to my earlier comment, the FDA might accept data from a single arm study without a control group and might not require overall survival as an endpoint as I suggested in the case of the DCVax-L combined with checkpoint modulators. Again, the time from enrollment of the first patient until approval could be as short as two years.

Northwest Biotherapeutics Comment 5: The Company’s Phase 3 trial of DCVax-L for GBM brain cancer is ongoing.  As previously announced, well over 300 patients have been enrolled in the trial and the patients are continuing to be treated in accordance with the trial protocol.  The trial remains subject to a partial clinical hold on screening of additional patient candidates.  The Company is in ongoing dialog with regulators, and providing further information.  The Company hopes that this issue will be resolved soon.

SOS Point 1: I am still mystified by this halt in screening as I wrote in a March 22, 2016 report A Comprehensive Evaluation of Its Lead Product DCVax-L  I think that if and when this issue is resolved, the reason could be something totally unprecedented.

SOS Point 2: This trial was scheduled to enroll 348 patients and the Company has said that meaningfully more than 300 patients have been enrolled. Does this mean 310, 320 or 330 have already been enrolled? Hopefully we will know soon.

SOS Point 3: While there was a halt in screening all patients enrolled have continued to receive the drug. This raises the question as to whether the number of progression free survival events specified will be reached before 348 patients are enrolled and how this might affect the statistical analysis.

Northwest Biotherapeutics Comment 6: The Company has received a letter from the staff of The NASDAQ Stock Market LLC (“Nasdaq”) indicating that the Nasdaq Staff reviewed certain stock issuances by the Company to Cognate, and determined that those issuances did not comply with Nasdaq rules 5635(c) and (d), as described in a Form 8-K being filed by the Company today.  The Company is currently in discussions with the Nasdaq Staff about two potential approaches to remedy the non-compliance with these rules, and the Company intends to take the appropriate steps to address the issues raised by the Nasdaq Staff as quickly as possible.

SOS Point 1: Northwest has until June 10 to respond to NASDAQ with a remediation plan, and if NASDAQ can allow six months from the notice letter for the remediation to be achieved.

SOS Point 2: This smells like something the short selling hedge funds would bring to the attention of NASDAQ. I can’t imagine NASDAQ picking it up on its own.

SOS Point 3: F-stein and the hedge funds have maintained that Linda Powers was somehow bilking NWBO investors because of her involvement in Cognate. My contention is that in the event that Cognate had demanded cash for its services instead of stock in lieu of cash that the phase 3 trial of DCVax-L would have stalled. The decision of Cognate to accept stock in lieu of cash was advantageous to NWBO shareholders in my view.

 Important Investment Issues

Overview

There is nothing worse than silence when it comes to an emerging biotechnology company. Investors expect and need ongoing updates on the status of clinical trials and plans for new trials in order to risk assess the potential of new products. Frustratingly, Northwest has been pretty much in a cone of silence since it announced last August that it was temporarily stopping enrollment in its phase 3 trial of DCVax-L in newly diagnosed glioblastoma.

As investors, we can only interpret data if there is some to interpret and we have literally been sitting on our hands over this period. Subscribers have repeatedly asked me to update my thinking and all I could say was that there was no difference in how I assessed the information and data available prior to the halt in screening and now and that it had not meaningfully changed. I reiterated my thinking in the March 22, 2016 report A Comprehensive Evaluation of Its Lead Product DCVax-L

In this press release, the Company has finally released important new information. It is not clear to me why they were silent for so long and then unleashed a flood of information at this one time point. Also, the press release is vague on timelines. Still, I welcome the return of an information flow.

Planned Phase 2 Trials Are Exciting

The items in the press release provide reason for optimism on the pipeline. As Northwest is preparing trials which may involve three large biopharmaceutical companies or academic centers. I believe that the three phase 2 trials will probably combine checkpoint modulators with DCVax-L. There is an exciting biological hypothesis that there will be synergy between checkpoint modulators and therapeutic cancer vaccines. Let me describe this in a simplistic way. Checkpoint modulators prevent cancer cells from turning down the immune response. However, may be the case that in some cancer patients there is not enough of an immune response. This might be because T-cell populations have been depleted or exhausted in fighting the cancer. Cancer vaccines can mobilize or augment an immune response, by significantly expanding the T-cell population. However, the cancer may respond by activating checkpoints to blunt this immune system activation against the cancer. If so, there should be considerable synergy in combining the two types of drugs.

It seems likely that one of the phase 2 trials may combine DC-Vax-L with an anti-PD-1 or anti-PD-L1 agent in relapsed glioblastoma. This is a tough disease but if the results are positive, I believe that a single phase 2 trial could be the basis for regulatory approval. I would guess that collaborators could come from a group comprised of Bristol-Myers Squibb, Merck, Roche, Astra Zeneca, Pfizer or others. There is also the possibility that academic centers might conduct trials. This interest by big pharma and perhaps academics provides a degree of validation for investors that has been lacking. F-stein and a number of detractors have vociferously argued that big pharma has dismissed cancer vaccines as having no therapeutic potential. This argument is now debunked. The forming of a scientific advisory board may also bring credibility and validation to Northwest’s technology base. I am anxious to see who is named to this board.

The updated data from the phase 1 portion of the phase 1/2 trial of DCVax Direct seems impressive, but it is hard to interpret. If you believe as I tend to that patients with inoperable tumors have survival expectations measured in months, the data from phase 1 suggests a compelling survival advantage. The problem is that it is difficult to estimate how long these patients might have survived without DCVax Direct. In this trial there were 13 different cancers treated in 40 patients and there were variations in dosage (number of cells and number of injections. This heterogeneity of data makes drawing firm conclusions difficult.

Still No Lifting of the Halt in Screening in DCVax-L Phase 3 Trial

The Company as has been the case since August of last year offered no reason for the halt in screening of the phase 3 trial of DCVax-L. In the press release it said “The Company is in ongoing dialog with regulators, and providing further information.  The Company hopes that this issue will be resolved soon.” I believe that Northwest might have thought that this issue would have been resolved late last year or early in 2016. Since none of us know the reason for the halt, it is impossible to assess why it has not been lifted or when it might be lifted. This is discomforting.

This phase 3 trial was intended to enroll 348 patients. Based on Company statements, I think that perhaps 310 to 320 patients have been enrolled and these patients have been treated in accordance with the protocol so the trial is almost done. The trial is designed to stop when 248 disease progressions occur in the combined arms of the trial and the data analyzed. One potential positive of this delay is that it has been the general case with immune-oncology drugs that about 30% of responders have very long and durable responses and indeed long durable responses were the most compelling part of the phase 1/2 data for DCVax-L. Perhaps the extremely long period over which this trial has been conducted will give some very important information on duration of response in subsets of patients.

Cash Position is Precarious: This is the Big Negative

The pipeline potential of Northwest is exciting. Unfortunately, the cash position is extremely stained as Northwest ended 2015 with $22 million of cash and it then raised about $9 million in an offering in February 2016. The proforma cash position at year end 2015 including that offering was about $31 million. Management has not issued any guidance for cash burn in 1Q, 2016 or subsequent quarters. For reference, the average cash burn for each quarter of 2015 was $20 million.

I think that the halt in screening may have reduced the burn rate meaningfully, but I can only guess at how much. I am guessing that it could be as little as $10 million per quarter due to the lack of trial activity. If so, the Company has cash to last until early 4Q, 2016. I await the 1Q, 2016 10-Q to get a better insight into the cash position.

The Company Needs a Lot of Cash to Conduct Its Trials

The completion of the phase 3 trial of DCVax-L and the execution of the phase 2 trials of DCVax-L combined with checkpoint modulators and the phase 2 trials of DCVax Direct in inoperable tumors will require a lot of money. Management has provided no guidance on the cash that will be required. If Northwest has to fund all of these trials by themselves, my guess is that they will need to raise as much as $80 million over the coming year or so.

The Company currently has about 101 million shares outstanding and the potential for additional shares from conversion of warrants and options could be 20 million shares or so. If the Company were to decide to raise $80 million at the current price of $1.33 it would probably have to offer shares at a discounted price of say $1.20 and would probably include 0.5 warrants for each share offered. If this were done, the Company would have to issue 66 million shares and 33 million warrants which would increase the fully diluted share count from about 120 million shares to 220 million shares.

It is possible that some of the funding for phase 2 trials might be provided by big pharma and there may also be government grants available for some trials. This is hard to guess and there is no guidance from management.

Investment Opinion

I believe that Northwest has one of the most exciting technology platforms and pipelines in immuno-oncology and in my opinion offers more potential than the current engineered T-cell investment darlings Juno and Kite. Juno and Kite sell at market valuations of $4.5 billion and $2.4 billion while the current market valuation of Northwest is about $160 million. Even if NWBO has to increase its fully diluted share count to 220 million, the market valuation would only be $290 million. I think that if Northwest had enough cash to fund the conduct of its clinical trials, I think the market capitalization would be $500 million to $1 billion or more.

I am very much encouraged by the planned phase 2 trials which if successful potentially could lead to regulatory approval for potentially two products, DCVax-L and DCVax Direct, in as little as two years from the beginning of the trials. However, the Company is in a precarious cash position. This along with the continued halt in screening in the DCVax-L trial will continue to overhang the stock and the potential need to issue an enormous number of new shares will continue to weigh down the stock price. Linda Powers has her work cut out for her, but she is a scrapper and I think she will find a way to carry out the planned trials. I am concerned that the stock might be forced down even further by the financial overhang and this prevents me from pounding the table to buy more shares. The only thing I can say is that I am holding my shares and if the cash quandary is resolved, I would pound the table with both fists.

 

 

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