Expert Financial Analysis and Reporting

I want to bring to the attention of paid subscribers to my website an idea that is essentially a trading idea on a stock on which I also have a very positive longer term view. I think that if my idea is correct that this stock could possibly have a 50% move and hopefully more, in the next few weeks.

I have only recently started my subscription service on my website after two years of building my brand and I am trying to get my website under control. My goal is to eventually have almost my entire content exclusive to paid subscribers, but for the time being I have to continue to provide free content on my website and on Seeking Alpha to keep an awareness of SmithOnStocks. However, ideas like the one in this newsletter are only for paying customers and I trust that you will keep this idea to yourself.

I intend to provide as many subscriber exclusive reports as possible to the website. I will sometimes publish just summaries of reports on the free portion of my website and on Seeking Alpha. I have been very surprised and appreciative of the enrollment on the website in the first month and I hope that this idea will justify your investment.

The stock I am referring to is Northwest Biotherapeutics (NWBO, $3.27). The stock has been beaten down by the disappointing phase II results of ImmunoCellular’s ICT-107. The bears have argued that ICT-107 and NWBO’s DCVax-L are the same product because both are based on dendritic cell therapy. Hence DCVax-L is doomed to failure in its phase III trial. There are numerous reasons why this may not be the case and I have gone into this in great detail in my recent report http://smithonstocks.com/immunocellular-post-hoc-analysis-of-disappointing-phase-ii-trial-of-ict-107/

The bears are led by Adam Feuerstein of TheStreet.com who frequently voices the opinions of short selling hedge funds. His latest tirade was described in my recent blog http://smithonstocks.com/adam-feuersteins-views-on-northwest-biotherapeutics/. In short, the stock has been beaten down and pummeled by short sellers. In technical parlance it is oversold. I think that an unexpected spark could touch off a pretty strong upside move for the stock.

I think that I may have detected that spark. Last Tuesday, December 10^th, I attended the Oppenheimer conference at which Linda Powers, the CEO of NWBO spoke. I am pretty familiar with the story but she made one remark, almost in passing that caused my jaw to drop six inches. She said that in regard to approval of compassionate use of DCVax-L in Germany that we should “stay tuned’.

So why is this big deal? About three years ago, German regulators began a program that would allow certain drugs that are not yet approved to be made available to patients on a compassionate use basis. I don’t know the whole process by which they decide to grant compassionate use, but let’s put ourselves in the position of the German regulators. What would we want to know if we decided to grant compassionate use approval?

Above all else, we would want to know that it is safe. This is no issue because we know that DCVax-L is safe with a side effect profile comparable to placebo. Having become comfortable that the product will do no harm, we then have to determine that the product could potentially help patients. Moreover, because the patients may have to pay out of pocket as much as $60,000 to $100,000 for a two to three year course of therapy, we would not want to just approve the product on the basis that it is safe and might work. We would want to look desperately ill, compassionate use patients in the eye and say that based on our scientific judgment; we think that spending $60,000 to $100,000 is a justifiable expense for you.

One of the major arguments of the bears is that the phase I data for 20 patients of DCVax-L in glioblastoma patients is flawed, worthless and should be discounted. They cite the disappointing results of ICT-107 and their view that ICT-107 and DCVax-L are the same product. They also contend that only very healthy patients who were more likely to do well were included in the trial. In other words, they maintain that NWBO cheated and stacked the deck. This is a bit preposterous, but it can’t be unequivocally refuted.

However, the German regulators have spent almost a year going over the data on the phase I trial of DCVax-L on a patient by patient basis for the 20 patients. They have also gone over the data for ovarian cancer patients and prostate cancer patients treated with what is essentially DCVax-L; this may have been around 30 patients. And there may have been as many as ten other compassionate use patients with other cancers treated. Hence, the German regulators may be looking at results in 60 patients and they know every detail that can be known about these patients unlike us investors who have extremely limited information.

Compassionate use approval by the Germans would be a lightning bolt of credibility. It would destroy the arguments of the bears who argue that there is no credible data to indicate that DCVax-L is effective. So why do I suspect that such approval is not that far off? Almost one year ago, NWBO filed for compassionate use in Germany. I was excited about this prospect and wrote about it in reports at the time. However, time dragged on and there was no news on compassionate use and when I asked management about what was going on they downplayed the prospect for a positive decision. In dealing with regulators, decisions always take longer than expected and I think that they didn’t want to set an expectation. They discouraged me from mentioning it as a possibility in my reports.

The above paragraph puts in perspective why my jaw dropped six inches when Linda Powers said “stay tuned” after radio silence for the past year. Let me emphasize that the sole basis for my suspicion that compassionate use potential is imminent is based on that one remark.

Here is my call. The stock is totally beaten up and oversold. If I am wrong on this call and compassionate use approval is never achieved, it is not likely to be a negative factor since the expectation for compassionate use is not in the stock. I would retain my positive stance on the stock.

Let’s say that compassionate use is obtained and the stock has a big move, then what? We should not automatically assume that the phase III trial is now guaranteed to be successful. I can just say that my confidence that there is a reasonable chance for success would be boosted. There remains the chance that we could be disappointed in 1Q, 2015 when the topline data is reported, but let’s think more about this in a year or so. From this point the downside risk in the case of failure is entirely justified by the enormously greater upside potential if the trial is successful. I’m not being equivocal on predicting the outcome of the trial, just honest. Only the gods of clinical trials know for sure if the phase III trial will succeed.

Let me throw in a few other things to chew on.

1. Northwest has applied for reimbursement from the German government for compassionate use. I am assuming that patients will have to pay for the drug themselves, but think of the message that would be sent if DCVax-L is given reimbursement. It would say that you the compassionate use patient should receive this product and we the German are actually going to pay for it. Pretty powerful, eh.
2. I believe that only a few drugs have received compassionate use approval in Germany and that this would be the first immunotherapy to be so approved. This is from many, many applications.
3. I think that as many as ten of the leading hospitals in Germany are ready to treat patients. I project that the cost per each patient will be about $100,000 spread over two and one half to three years if the patient lives. I don’t think that the revenues are going to reach “knock your socks off” levels but they could reach a few million dollars and will show up in the income statement.
4. The Company is internally excited about DC Vax Direct which is being tested in phase I clinical trials in inoperable solid tumor cases. Any objective response, i.e. tumor shrinkage, in just one patient would be noteworthy. I have downplayed the potential for this, but the excitement of the Company is obvious. Anyway, there is little expectation for this. We could hear something in 1H, 2014.