Expert Financial Analysis and Reporting

Overview

This has been a tough year for many small emerging biotechnology firms. Many have been in a bear market while the market as a whole had a reasonable year. The group did very well in 2013 and early 2014 and kept pace with strong price performance by the larger biotechnology companies. In March of 2014, questions about the aggressive pricing of Gilead’s Sovaldi ($84,000 for a twelve week course of therapy for hepatitis C) touched off a fire storm of criticism from private and government payors and led some politicians to charge that the industry was price gouging. This resulted in a correction for all biotechnology companies large and small. Subsequently, the stocks of most of the large companies such as Gilead, Amgen and Celgene recovered and have had excellent performances since the March correction. This is not so with some of my favored names as Northwest is down about 30% since its March high, Antares 40% and Neuralstem 40%.

There were some fundamental concerns that explain the decline in Antares, but Northwest and Neuralstem have had some very positive fundamental developments throughout the year. It is generally the case that small biotechs are more volatile and tend to outperform on both the upside and the downside relative to the big biotechs. They certainly underperformed on the downside but uncharacteristically way underperformed when the big biotechs rallied. One necessary ingredient for small stocks to do well is the need for some speculative fervor and propensity to take risk. This just didn’t seem to happen in the last three quarters of 2014 as the excitement about small biotechs in 2013 did not carry through.

Some people have called me paranoid, but I think that small biotechs are enormously affected by hedge funds who view them as attractive shorting targets. There is always a great deal of uncertainty about small biotechs because they are involved in high risk clinical trials and performance is often dictated by outcomes of binary events which are relatively far apart. Between such events, there is not much information that investors can hone in on. A few well-placed rumors from short sellers along with what appears to be coordinated short selling can significantly affect stock prices in these interim periods between key clinical or regulatory events. Jim Cramer explained how short sellers can manipulate stock prices in an interview that has been memorialized on the internet.

The behavior of shorts in regard to Northwest Biotherapeutics was particularly alarming. As I describe later in this report, NWBO had a number of very positive developments in 2014. Had I known about them at the beginning of the year, I would have expected a sharp increase in price. Instead, the stock is not that much up in 2014. The one factor that stood out in 2014 was a ferocious attack by Adam Feuerstein on the Company. He wrote 21 negative blogs on the Company and each time NWBO released positive news, Feuerstein was quick to attack the news. In all of the important events, Feuerstein went to great lengths to turn good news into bad news.

I think that Feuerstein has very limited understanding of biology or clinical trials and I think many people would agree with my assessment. Unfortunately, in most cases the Feuerstein articles, regardless of how poorly reasoned and unbalanced, were accompanied by heavy shorting of the stock. The Washington Post writer Steven Pearlstein showed how there was aggressive shorting before, during and after several articles on NWBO. Citizens for Responsibility and Ethics in Washington (CREW) took Feuerstein to task and called for an SEC investigation of his actions. None of us have the subpoena power necessary to determine if Feuerstein is just a cynical reporter or fomenting for short selling hedge funds, but I have certainly noted the same coordination between inaccurate and misleading Feuerstein articles and sharply negative effects on stock prices for other companies.

Northwest seems to have been singled out for attack by Feurstein and a number of camp followers who mimic his behavior. This has led to numerous attacks by Feuerstein on his blog on The Street.com and by other writers on Seeking Alpha. In most or all cases, there seems to be a close correlation with short selling. Neither Antares nor Neuralstem has seen the level of attack as NWBO, but both have been greatly affected by what can be interpreted as coordinated short selling attacks and this has been true of many other small biotechnology companies. In the case of Neuralstem, events during the year were generally quite positive, but the stock traded down on good news. Antares had some fundamental concerns that justified price weakness, but the degree of selling seemed out of proportion.

I must admit that my thinking on emerging biotechnology stock investing has changed over the last year due to the ever growing influence of short sellers. It has always been my strategy to keep my sights on the fundamental developments that are driving my recommendation; this is usually clinical trial results, regulatory actions and product introductions. It has been my experience that there are always negatives that can develop and as long as my long term outlook remains little changed, I am willing to look through uncertainties. The demonstrated ability of short sellers to turn good news into bad news has made me more circumspect. As you will see shortly as I explain my thinking on Agenus, pSivida and Derma Sciences, my investment judgment is more influenced by short term events because of the disproportionate effects on stocks that short sellers can exert.

Summary of Investment Recommendations

Altogether, I now have active coverage on 13 names. Of these, I have buy recommendations on five stocks. These are Northwest Biotherapeutics, Neuralstem, Antares, Cytokinetics and Celldex. I am planning to add new coverage and new buys in 2015.

Buys

Northwest Biotherapeutics and Neuralstem are my home run calls. Clinical data is suggestive that the high risk, paradigm changing technologies that they are pioneering have a reasonable chance of success. If data continues to evolve positively, they could be the next Celgene or Gilead. While there is substantial downside in the case of failure the upside reward compared to downside risk seems dramatically in their favor.

Antares has probably less dramatic upside and less downside, but I still have a price target suggesting a doubling or tripling by 2016. I believe that Cytokinetics could see a quick 50% or more increase in stock price if tirasemtiv goes into a phase 3 trial for ALS. This is dependent on obtaining a Special Protocol Assessment from the FDA in which the agency agrees that Sustained Vital Capacity is an acceptable primary endpoint. The key factors that will drive Celldex are dependent on key clinical trial outcomes in 2016 that could lead to asymmetrical upside. I think that the possibility of approval of rindopepimut for recurrent glioblastoma in 2015 gives the stock meaningful upside potential as we await 2016.

Buy/Hold; Uncomfortable Recommending at Current Price

Chimerix and Repligen both have outstanding business outlooks in my opinion, but the stocks seem to reflect this and from my standpoint seem a little ahead of where I am comfortable aggressively recommending purchase.  I think that looking out over several years that these stocks could be excellent performers. I am calling these companies Buy/Hold. This should be interpreted as meaning that I would hold them in my portfolio, but would only be buying at the current price if I had a long time horizon. I am not a stock trader and I am reluctant to try to time price movements. I find that once you sell a stock it is very hard to buy it back and I think that although the stocks seem pricey, the long term price outlook is good. Under no condition would I sell these stocks.

Waiting for Certain Events before Upgrading

I believe that both Agenus and pSivida have very intriguing long term prospects and from this price the stock price potential could be quite substantial. However, I see the potential for short term events to have a meaningfully negative impact on stock prices and I am lying low for the present.

Derma Sciences had very disappointing performance with its advanced wound care products which caused me to go to a hold. It looks to me like this business is getting back on track and as I gain more confidence I am likely to go back to a buy on the stock.

Discovery Laboratories has been very disappointing for me. The recent delay in the completion of the phase 2a trial of Aerosurf was disconcerting and means that we won’t see the crucial phase 2b results until 1H, 2016. This also means that they may have to seek a partner for Aerosurf before phase 2b results are announced (which would attractiveness of the deal) and also do an equity financing. I could upgrade if there are signs of efficacy in the Aerosurf phase 2a trial results which will be reported in 1Q, 2015.

Other Companies That I Am Interested In

I am not recommending Inovio or ImmunoCellular or at this time and have no immediate plans to do so, but they are interesting to me and I could see scenarios in which I might recommend them.

Dropping from Active Coverage

I have decided to drop Heron Therapeutics from active coverage. I just don’t have the rapport with management that I would like. Also, a slower rate of enrollment than projected over the last quarter for Heron’s ongoing phase 3 of its lead drug Sustol for chemotherapy induced nausea and vomiting won’t complete phase 3 enrollment until 1Q, 2015. The Company will resubmit its NDA shortly thereafter and approval could come in mid- 2016. I may revisit the stock later. Cubist is being dropped because it is being acquired by Merck.

 

Northwest Biotherapeutics (NWBO, Buy, $5.69)

Given the number of very positive developments in 2014, I am surprised that the stock has not done better from its 2013 closing price of $3.77. Here are the major accomplishments of 2014.

• It was announced on March 10^th that The Paul Ehrlich Institute, which is the German equivalent of the FDA, granted approval of DCVax-L under its new hospital exemption early access program. This means that Northwest can sell DCVax-L for newly diagnosed and recurrent cases of glioblastoma and lesser grade brain tumors. It was also revealed that DCVax-L will be eligible for reimbursement in the same manner as a drug approved under the normal regulatory approval. DCVax-L was the first systemic drug to be approved and reimbursed under this program. These were stunning positives in my opinion. For more details, refer to this report.
• On May 27^th the Company reported on interim results from the phase 1 trial of DCVax Direct trial in several different types of solid tumors. This has been followed by other data releases, the most recent of which was at the December 10^th presentation at the Oppenheimer conference. The data is early, but quite encouraging http://smithonstocks.com/northwest-biotherapeutics-putting-recent-clinical-data-on-dcvax-direct-in-perspective-nwbo-buy-5-37/ as there has been evidence of both clinical effects and biological effects. The most encouraging single patient result has been seen in a stage 4 pancreatic cancer patient. There have also been extremely interesting signals of activity in sarcoma, ovarian and lung cancer patients. With the caveat that we are looking at very small numbers of patients and a short length of treatment, the data is extremely encouraging. This has all materialized in 2014.
• On August 11^th the company announced that it had received approval from US, UK and German regulators to statistically account for the level of certain white blood cells in patients following 6 weeks of radiation. This was an adjustment to the statistical analysis of the trial and in no way affected the enrollment criteria or the primary and secondary endpoints of the trial. The purpose is to be able to guard against an imbalance in enrollment for this variable. The study was already designed to adjust for imbalances in MGMT methylation status and degree of tumor resection. Also, the size of the enrollment was increased from 312 to 348 patients and the number of cancer progression events needed for the primary endpoint analysis was increased from 110 to 248. The result of the latter is that statistical analysis can be reached with progression free survival of just four months instead of six months. These somewhat arcane statistical events greatly de-risk the trial. In addition, it will provide a wealth of information about the treatment of glioblastoma patients on DCVax-L and standard of care. This is all evidence that this is a well-designed and well run trial.
• OnSeptember 16 DCVax-L was the first drug to be awarded the UK’s new Promising Innovative Medicine (PIM) designation. This is the first step in the Early Access to Medicines Scheme (EAMS) which like the German hospital exemption early access program is intended to make potential breakthrough drugs available to patients before formal approval.
• On November 19^th, the Company announced that one of the most prominent investors in the UK, Neil Woodford, had invested $25 million if the Company at a price of $5.79 which was a premium to the market price.  This amounted to about 7% of outstanding shares. This capped an amazing feat of financial engineering in 2014. At the beginning of 2014, the Company had just $18.5 million of cash. In 2014, it faced the challenge of funding the phase 3 clinical trial of DCVax-L, the phase 1 trial of DCVax Direct and the establishment of a European commercial scale manufacturing operation. It was able to raise sufficient amounts of capital to perform all of these functions and will still end the year with about $37 million of cash.

This was an impressive set of accomplishments, particularly the validation of the DCVax-L technology by the German and UK regulators, and yet the stock is only up 45% year to date and down sharply from its March high. There are three primary reasons for this. The first two were the general weakness in stock prices for emerging biotechnology companies and the increase in share count that was a consequence of the funding activity in 2014 which raised $88 million. The final and probably the most important factor was an attack on the Company and its management by Adam Feuerstein that can only be described as ferocious and slanderous. In 2014, he wrote 21 negative articles on the Company. Each time that positive news was announced, he would issue a blog putting a negative spin on the news. This was accompanied by very significant short selling as the number of shares sold short during 2014 from 3.6 million to 8.8 million. Naked short selling may have added as many as 4 million short sells in 2014 although this is difficult to estimate.

In looking forward, there are a number of catalysts to consider.

• I think that we shall hear about product sales in Germany by the end this year or early 2015. These sales will initially be modest as the difficulty in satisfying all of the requirements for use of DCVax-L and for reimbursement are of staggering complexity. Recording first product sales is always a landmark for an emerging biotechnology company. I think that sales in 2015 from Germany could be in the range of $3 to 5 million or possibly more; this assumes 30 to 50 patients at a price per course of therapy of about $100,000. I don’t yet have an estimate for the UK.
• The DCVax Direct trial completed enrollment in July so that the last of 40 patients should complete the six injections by March 2015. Because the trial is open label, we may see more data before the trial is completed. Results in all patients may be reported sometime in 2Q, 2015. The reader should realize that these patients will have to be followed as long as they live to determine the ultimate effect of DCVax Direct. However, these are all inoperable, end stage cancer patients so that it should not take too many months to determine biological and clinical effects of the drug.
• A phase 2 trial of DCVax Direct should begin in two solid cancer types in 1Q, 2015. In a highly optimistic case in which demonstrable effects are seen, this could lead to registration in 2017. These patients have no other treatment options.
• The phase 3 trial of DCVax-L in glioblastoma should complete in 3Q or 4Q, 2015 with topline results in late 2015 or early 2016. This is obviously the big event of the year.

The headwinds for 2015 remain the investor caution about emerging biotechnology in general. Also, the needs for capital to complete the clinical trials and ramp up manufacturing could require raising another $50 million or more. The Feuerstein attacks and attacks by his camp followers will probably continue unabated. Even though all of his fundamental attacks on the Company have been discredited, this has never stopped the attacks; a new strawman argument is quickly switched to.

So there are a broad and complex number of issues for 2015 that will be material to the stock. I fully recognize that clinical trials of new drugs are difficult to predict and it may be the case that the phase 3 trial of DCVax-L and the phase 1 trial of DCVax Direct could produce disappointing results for reasons that I have not anticipated. With this considerable caveat, the data that we have seen suggests that dendritic cell cancer vaccines can be a major breakthrough in the treatment of cancers and the safety with which efficacy is achieved. As in 2014, through thick and thin, I retain my buy recommendation until the fundamental outcomes prove me right or wrong. 

Neuralstem (CUR, Buy, $2.64)

I wrote an extensive report on Neuralstem on August 26, 2014 that went over the status and timelines for the phase 1 and 2 trial of the NSI-566 stem cells in ALS and the phase 1 trials in chronic spinal cord injury, acute spinal cord injury and ischemic stroke. It also goes into phase 1 results for the small molecule drug NSI-189 for major depressive disorder and plans to start a phase 2 trial in 2015. I would urge you to read that report in order to understand the basis of my investment thinking.

The key event for the stock in 2015 will be reporting topline results on the phase 2 trial of NSI-566 in 15 ALS patients. The last surgery was completed in July, 2014 and topline results should be made public in 1Q, 2015. The lead investigator on the study, Eva Feldman has signaled that the results were encouraging (remember this is an open label trial) and that she is working on writing the protocol for a subsequent phase 2b trial that could be the basis for regulatory approval. Based on this, I have high expectations that results will be encouraging. Altogether, this brings the data set to 20 patients who have had the ALS surgery. I think that this could trigger a rally in the stock.

A trial in four patients with chronic spinal cord injury was started in 2014 with the last surgery scheduled for November of 2014. We should hear some results in 2015. Stem Cells is going into a phase 2 trial using stem cells similar to those of Neuralstem based on encouraging signals of activity in its phase 1 trials. The phase 2 trial of NSI-189 should start in 2015, but topline results are down the road in 2016 or 2017. It is difficult to determine if there will be any data in 2015 from an ischemic stroke trial of NSI-566 in China or an acute spinal cord injury study in South Korea. I recently published a blog about an anecdote on the first patient treated in the Chinese ischemic stroke trial that was encouraging.

Neuralstem has enough cash to continue well into 2016. It will not have to finance before or immediately after the phase 2 results in ALS are announced. There has been some concern about patent litigation filed by Stem Cells against Neuralstem and this has weighed on the stock. In a recent report, I explained why I thought this was not a significant investment issue.

Antares (ATRS, Buy, $2.60)

I recently published a fairly detailed report on Antares called Antares: 2015 Could Be the Breakout Year for the Stock.   which laid out the reasons for my buy recommendation. One of the most important near term fundamental factors for the stock is my belief that investors will come to view the Otrexup launch as a success. The initial phase of the launch was slow and viewed as disappointing by some investors and this has weighed on the stock. Slow new product launches have become the norm due to actions of managed care.

Specifically, I think that Otrexup will reach sales of $8 million in 2014, $23 million in 2015 and $37 million in 2016. At $23 million of sales it should be profitable. A second major factor in my thinking is my belief that EpiPen will be launched with an AB rating in June 2015. By the end of 2015, I see it as reaching $32 to 38 million of sales and $25 million of pretax income on an annualized basis.

The Company has a very strong pipeline of products for its own account. Quick Shot Testosterone is the next product that will be marketed by the Company with a probable launch in 2017. Management has also stated that it will unveil a third product for its own account QSM in 2015. The pipeline for alliance partners is also strong. Teva will launch TevTropin 10 mg in 2015 and possibly an AB rated version of Glaxo’s Injectable dosage form of Imitrex. Management has also told investors that it is working on two pen products with Teva which we will learn about in 2015.

I am projecting strong increases in sales of $26 million in 2014, $58 million in 2015 and $93 million in 2016. I project EPS as ($0.24) in 2014, ($0.05) in 2015 and $0.13 in 2016. This rapid growth should capture the attention of investors and the very strong pipeline prospects should add further to investor enthusiasm.  My price target range for 2016 is $6.00 to $12.00.

Cytokinetics (CYTK, Buy, $4.89)

My buy is based on the possibility that tirasemtiv may enter a pivotal phase 3 trial in ALS in 1H, 2015. The stock plummeted after tirasemtiv failed to hit the primary endpoint based on the ALSFRS-r scale in a phase 2b trial that reported topline results in April of 2014. This caused the stock to drop from a close of $12.99 on April 24^th, the day before the data was reported to a close of $4.59 on April 25^th. Investors wrote the product off.

Further analysis of data produced a ray of hope as one of the secondary endpoints; sustained vital capacity (SVC) reached very strong statistical significance. SVC is the most important measure of breathing function in ALS patients. Because most ALS patients die from respiratory complications, an improvement in breathing function would be of enormous importance. For more information refer to this report.

Based on consultation with key opinion leaders, Cytokinetics believes that the FDA and other regulators may accept SVC as a primary endpoint. It will request from the FDA a Special Protocol Assessment in which the FDA states that SVC will be an acceptable primary endpoint. If the SPA is granted, I think that investors will initially be skeptical, but will come to believe that there is an excellent chance of being successful in a phase 3 trial. I think this could cause a good upside move in the stock, initially to $6.00 or so and then higher. I think that the decision from the FDA could come at any time.

If the FDA does not agree to this SPA, I think that it is a virtual certainty that tirasemtiv development will be abandoned. The value of the stock at that point would largely be due to omecamtiv, their unique new drug for congestive heart failure. I believe that the immediate effect would be for the stock to drop to the $3.00 or so range. The key catalyst for the stock then would be the decision by Amgen on whether to move this product into phase 3 in 2H, 2015. If the decision is go, I think the stock could get back to $5.00 or so. If the decision is no go, I could see the stock dropping below $1.00. My best judgment is that Amgen will decide to move omecamtiv into phase 3. We should learn of Amgen’s decision by 3Q, 2015.

Celldex (CLDX, Buy, $18.82)

The immediate investment thesis for Celldex is driven primarily by two drugs, rindopepimut and glembatumumab, which are in late stage development and both could potentially be approved by 2017. The Company also has a promising pipeline of immunotherapy drugs in phase 1 and pre-clinical development and a technology platform that allows for the development of a broad number of antibody based drugs. This should allow the Company to be a major player in immuno-oncology, the hot area for cancer research. I could see Celldex being a takeover target because of this.

The financial situation of the Company is reasonably sound even though it has a prodigious quarterly burn rate of about $25 million per quarter. At the end of 3Q, 2014 it had about $224 million of cash which is roughly 9 quarters of cash. I would expect the company to raise money in 2015 or early 2016, but it should be able to do so from a position of strength.

In November 2014, the Company released encouraging data on a randomized trial of its cancer vaccine rindopepimut in recurrent glioblastoma. The trial has not quite reached completion, but the data to this point strongly indicates that the drug will have a statistically significant effect on both six month progression free survival and overall survival. I think that this could be sufficient for accelerated approval for recurrent glioblastoma in late 2015 or 2016. Almost all glioblastoma patients who initially respond to standard of care have a recurrence; after recurrence life expectancy is only a few months. This caused me to upgrade the stock.

A large 700 patient trial in newly diagnosed glioblastoma could report on the first interim analysis in mid-2015 and there will be a second interim analysis in late 2015; final topline data should be available in 2016. The positive results in recurrent glioblastoma bode well for success in the newly diagnosed glioblastoma population.

The second drug glembatumumab is based on an antibody that targets the glycoprotein GPNMB which is expressed on the cell surfaces of several types of cancer. Attached to this antibody through a proprietary linker developed by Seattle Genetics is a cytotoxin called auristatin. Once the antibody attaches to the GPNMB receptor, the whole molecule is internalized; the auristatin is released in the interior of the cell and leads to death of the cancer cell. For more detailed information, refer to this report.

This is a novel mechanism of action distinct from tyrosine kinase inhibitors, targeted therapies, naked antibodies and chemotherapy that are currently mainstays used to treat breast cancer. The phase 2 EMERGE trial in 124 refractory breast cancer patients with some degree of GPNMB expression encouraged the Company to do further studies in triple negative breast cancer. This was the basis for the enrollment of the now enrolling METRIC study which could be the basis for accelerated approval if METRIC results approximate the initial study. Topline results from METRIC are expected in late 2016.

Triple negative breast cancer is responsible for 15% of breast cancers that do not respond to hormone therapies or HER- targeted antibodies. There are no approved therapies although chemotherapies are used off-label to treat patients so there is a great unmet need. The immediate market for the indication in the METRIC trial is about 4,000 patients whose triple negative breast cancer patients who have high expressions of GPNMB. Assuming a fairly typical price of $60,000 for annual treatment, the US addressable market is $240 million. I would expect rapid penetration of this market so that 2018 sales could be in the $125 million range.

Glembatumumab also has potential in second and first line breast cancer for all breast cancer patients who express GPNMB in significant amounts, not just triple negatives. GPNMB is also expressed in other cancers. A phase 2 trial was just begun in stage 4 melanoma. There are some analysts who believe that this drug could be a several billion drug. I am not there yet. Celldex may elect to partner this drug if METRIC is successful as further clinical development expenses could be quite large.

There are about 12,000 cases of glioblastoma each year of which perhaps 10,000 are resectable. Rindopepimut targets about 30% of the 10,000 patients who are resectable and express the EGFRvIII mutation. Assuming success in the phase 3 trial and depending on the robustness of the phase 3 data, the pricing could be $60,000 to $100,000 for a course of therapy. This suggests an addressable market of $180 to $300 million in the US in newly diagnosed glioblastoma. While Avastin is approved for recurrent glioblastoma, it has not demonstrated any survival advantage so approval of rindopepimut would lead to very rapid penetrations. It remains to be seen how it might compare to the dendritic cell vaccine DCVax-L that is being developed for all forms of newly recurrent glioblastoma. The commercial potential in the remainder of the world is comparable to the US.

The Company has a broad pipeline of antibody based products in development that should add to the value of the pipeline. The most interesting of these is virilumab, a checkpoint inhibitor. The three most clinically tested checkpoint inhibitors- Yervoy (ipilimumab), Keytruda (pembrolizumab) and Opdivo (nivolumab) all block the ability of the a cancer cell to turn off the activity of T-cells against cancer. Varlilumab directly stimulates T-cell responses against cancers. This is somewhat different mode of action and suggests that could be synergistic with the three other types of checkpoint inhibitors. There is collaboration with Bristol-Myers to test this drug in combination with Opdivo.

The really important year for Celldex investors will be 2016 when investors will see the topline results of rindopepimut in newly diagnosed glioblastoma and glembatumumab in triple negative breast cancer patents expressing GPNMB. Success in one or the other of these trials should result in a significant move in the stock and success in both would be really dramatic. I think that the probable approval of rindopepimut in late 2015 for recurrent glioblastoma could result in a meaningful move in the stock as we await 2016.

Repligen (RGEN, Buy/Hold, $21.55)

I think that Repligen’s (RGEN) bioprocessing business is one of the best business models that I have seen in my many years as an analyst. Its products are used in the manufacturing of biologic drugs. They enjoy incredibly long life cycles because changing the manufacturing process for a biological product once it is approved or after it has completed phase III trials can change the characteristics of the product. Hence, a change in the manufacturing process at virtually any level can create troublesome regulatory issues as the FDA will require assurance that the product is unchanged. The agency may request new studies, possibly including clinical trials in humans that demonstrate that there is no change in the product. Few if any biopharm companies are willing to take that risk. Hence, the long life cycle for Repligen’s products. I have written extensively about the Company and reports can be seen in the Reports section of my website.

The foundation of Repligen’s bioprocessing business is protein A, which is used to purify monoclonal antibodies during their manufacturing process. Repligen supplies over 98% of the world market for Protein A. Given the product development activity in monoclonal antibodies, this business should be able to provide sustainable 8% to 10% growth for the next decade. Management has also impressed investors with its ability to innovate as witnessed by the OPUS chromatography business and to make strategic acquisitions. Repligen is strongly cash flow positive and will use this cash to make acquisitions. It has licensed its biotechnology products to Pfizer and BioMarin and these represent further upside potential.

I continue to wrestle with the valuation of Repligen. Management has guided that the bioprocessing business is projected in 2014 to have $58 to $60 million of sales and net income of $8 to $10 million. I project organic five year growth for sales of 14% and 28% for net income. However, I expect acquisitions to be made that can significantly increase the rate of increase of both sales and EPS. The Company is currently selling at about 56 times projected net income for 2015 and 10 times projected revenues, which is at the high end of my comfort zone or a little outside.

Despite my discomfort with the valuation, I would not even think of selling the stock. I think that this is a rare company with outstanding business fundamentals and I have learned from hard experience not to make price judgments when I am dealing with truly extraordinary companies. You could not pry this stock out of my portfolio. It is possible (probable) that some event could arise that might inappropriately cause a decline in the stock and create a buying opportunity.

Chimerix (CMRX, Buy/ Hold, $38.62)

I think that the Company’s lead drug brincidofovir is an extremely promising, broad spectrum anti-viral drug for the treatment of severe infections caused by double stranded DNA viruses. The first important applications (assuming success in current phase 3 trials) will be in the allogeneic stem cell transplant setting to prevent infections caused by cytomegalovirus and adenovirus in the immunocompromised stem cell transplant recipients and also in other immunocompromised patients such as chemotherapy patients. I project that the drug will be approved in 2017 and my model projects $800 million of sales in 2021 from these indications. It is potentially active against other double stranded DNA viruses, importantly smallpox.

I believe that this level of sales in 2021 could result in a market capitalization in 2020 of five to eight times projected one year forward revenues in 2021 which is $4 billion; this is $133 to $213 per share. I arrive at this multiple of sales by noting the current market capitalization to sales ratio of several successful biotech companies: Alexion sells at 12 times 2015 estimated revenues, BioMarin at 12, Gilead at 6, Regeneron at 12 and United Therapeutics at 5. This $800 million sales estimate does not include projections for use in smallpox, Ebola or potentially other viruses and does not include any sales from new products internally developed or acquired.

I think that there is a very real chance of the Company being acquired by a major biopharm company if the phase 3 trials in cytomegalovirus and adenovirus are positive. We should learn of topline results in 2H, 2015 for cytomegalovirus and 2016 for adenovirus. Given the acquisition activity in the anti-infective space as evidenced by the acquisitions of Trius and Cubist, an acquisition of the company in 2016 or 2017 is quite possible.

The stock has done quite well following my recommendation on May 21 at $14.22.    The news of the potential use of brincidofovir against Ebola triggered a sharp run-up in the stock. The stock closed on the day before the announcement on September 8 at $23.25. In the subsequent month or so with the great uproar over Ebola, the stock has soared to a recent high of $38.60. The Ebola scare has been a major factor in adding $400 million to Chimerix’s market value bringing it to about $1.4 billion. I am skeptical that use of brincidofovir in Ebola will produce any meaningful sales. I think that this is a very positive investment situation, but given the Ebola run-up, I am not recommending purchase of the stock at this price. This should not be construed as a sell recommendation.

For a more detailed discussion of the Company please refer to my initiation report of March 13, 2014

Agenus (AGEN, Hold, $3.93)

The investment thesis for Agenus has shifted dramatically with the acquisition of 4-Antibody on February 13, 2014. My original interest in the company was driven by its heat shock therapeutic vaccine technology and its vaccine adjuvant business. With the 4-Antibody acquisition Agenus has refocused the Company on the development of checkpoint inhibitors, which is one of the hottest areas of cancer research on the planet.

Agenus has a broad portfolio of six checkpoint inhibitors that are currently in the pre-clinical stage, but will all enter the clinic in 2015 and 2016. It is not in the leading development position with any of these six, but it is a respectable third or so in several. My investment thesis is that Agenus will be acquired by one of the several large biopharma companies that have missed the early stage of the checkpoint furor. Acquiring Agenus would give any company a respectable position in this key area of cancer research.

The current challenge for Agenus is that it will need to partner its legacy heat shock protein products, specifically Prophage for glioblastoma and HerpV for herpes simplex, as it devotes all of its development resources to the checkpoint inhibitors. These may not be easy assets to partner because the technology is controversial and the stage of development is still early. If this is the case and the market begins to sense that these assets may have to be put on the shelf, it could cause a major perception issue. Agenus has been a target of Adam Feuerstein in the past and I could see him attacking Agenus as fiercely as he has Northwest Biotherapeutics. This would be the time to buy the stock.

Agenus should begin to realize some commercial royalties from its QS-21 Stimulon vaccine adjuvant business. The announcement of success of Glaxo’s phase 3 trial for its shingles vaccine which includes QS-21 caused a nice rally. Also, Glaxo is planning a launch of its malaria vaccine which also includes QS-21. There are several other vaccines in development from Glaxo and others that use QS-21. I see this as a positive supplementary business but not a driver for the stock.

Derma Sciences (DSCI, Hold, $8.92)

My investment thesis on Derma Sciences has been that its advanced wound care business justifies much of the stock price. If so, their potential blockbuster drug for wound healing, DSC-127, is not meaningfully factored into the stock price. Advanced wound healing is a $36 million business that prior to 2014 had been growing at 30+% per year. The dominant product in 2013 and earlier years was Medihoney followed by TCC-EZ. The third major leg of the business, AmnioMatrix and AmnioExcel (which could become the most important) were just acquired this year.

The year 2014 was a year in which Medihoney and TCC-EZ encountered unexpected problems which appear to be one time in nature. A key competitor began to counter-promote against Medihoney and alleged that it was being promoted for unapproved indications; this greatly slowed its growth. TCC-EZ was affected by a misclassification of its status with CMS that resulted in a 20+% drop in its reimbursement price. The Amnion products were just in the roll-out phase and contributed little. Because of all of these issues, I went to a hold on the stock until I could determine when and if management could turn the situation around.

At a recent presentation at a brokerage house conference, management said that Medihoney was back on track. They said that CMS had reversed itself and had increased the price of TCC-EZ by 61%. Also, increased reimbursement from MACs for the Amnion products should lead to meaningful sales in 2015. All of these factors suggest that advanced wound care will be back on track and accelerating in 2015, which would be a major catalyst for the stock. Because, management was overly optimistic about its ability to handle the negative issues of 2014, I am waiting for more evidence that the situation has turned before upgrading my opinion to buy from hold, but it is my expectation that I will do so in 2015.

Enrollment of DSC-127 has not yet reached the halfway point and management is now pointing to completion in late 2015 with topline data in 2016 and assuming success, commercialization in 2017. This is a big bet for Derma and the risk of failure is significant. If the trial is successful, I think that the stock would have a dramatic increase in price. If DSC-127 fails, I think that the current business more than justifies the current price.

pSivida (PSDV, Hold, $4.22)

The approval of Iluvien for diabetic macular edema in most major countries of Europe and the US suggests that this could become a major asset for pSivida. The product was licensed to Alimera in the US and Europe and it is building a direct sales force to market the product on its own in both regions. pSivida has a deal with Alimera in which it does not have to pick up any of the costs of the launch, but has a profit sharing deal that amounts to about 15+% of sales. My analysis is that Iluvien can achieve US sales of 100 to $200 million by 2020 and that European sales in the same time frame could also reach $100 to $200 million. This would result in pretax profits of $30 to $60 million for pSivida.

pSivida is developing on its own a product called Medidur for the treatment of posterior uveitis. The product is in a phase 3 trial in which enrollment will complete in 2015 and topline results will be available a little over one year later in 2016. Medidur uses the same back of the eye delivery device and the same drug as Iluvien; also the drug used in Medidur has already been approved for this indication using a different sustained release technology. There is a very strong probability for success in this trial and the commercial opportunity for Medidur approaches that of Iluvien. pSivida has sole rights to this product.

Most of pSivida’s research and development is now centered on the Tethadur technology which could have the potential to be a sustained delivery technology for delivering biologicals not only to the back of the eye, but also systemically. The Company is currently in a technology assessment stage with an unidentified potential partner investigating the potential to develop a biological drug to deliver to the back of the eye. The potential partner and the drug have not been identified, but it is speculated that it is Roche and Lucentis. If this develops into a partnership in 2015, it would be a major positive for the Company.

I like the three major assets of the Company and pSivida is in a solid financial position with cash of $39 million and a quarterly burn rate of $3-4 million. However, I think that the stock faces some difficulties stemming from the Iluvien launch. Managed care has slowed the uptake of new products so that the vast majority of product launches have been slow and disappointing. I think this will also prove to be the case with Iluvien as it is launched in the US in early 2015. I think that this will have a negative impact on pSivida and I want to get this factored into the stock and behind us before becoming more aggressive on the stock. I do expect to go to a buy in 2015.

Discovery Laboratories (DSCO, Take tax loss, $1.25)

Discovery Laboratories has been perhaps the most disappointing stock that I have been involved with in my career. There has been setback after setback over the last decade. Still, I am intrigued by their technology and I believe that Aerosurf, if successfully developed, has the potential to change the practice of neonatology and to be one of the commercially most promising drugs in biotechnology. However, the Company has not yet shown proof of concept in a randomized trial.

On its last quarterly results conference call, the Company pushed back the timeline for releasing results from the phase 2a trial of Aerosurf and reported that the sales results for Surfaxin were only $106,000 in the third quarter and $176,000 for year to date. The Surfaxin launch has been a significant disappointment. The Company’s guidance at the beginning of the year was that the phase 2a trial would be completed in 3Q, 2014 and then was changed to 4Q, 2014. Now once again they have pushed it back to 1Q, 2015. Similarly, the original sales guidance for Surfaxin was that it would achieve $8 to $12 million in the first full year of marketing following its launch early this year. It now looks like $500,000 or so of sales could be a reach.

The Aerosurf delay is obviously a significant near term negative for the stock as it further delays the start of the phase 2 b trial. This proof of concept trial for Aerosurf is the key for a significant price inflection (assuming a positive outcome) as this would suggest a high probability of success for phase 3. This would be a major catalyst for the stock. Investors are now unlikely to see the phase 2b results until 1H, 2016. There might be some encouraging data reported from phase 2a in 1Q, 2015 suggesting benefit from Aerosurf administration. However, this is a trial aimed at determining safety and is enrolling only 42 babies. Hence, signals of efficacy would be suggestive rather than definitive.

This delay in the completion of phase 2a and the subsequent delay in the start and completion of phase 2b is a significant negative for the financial status of the Company. Discovery ended 3Q, 2014 with $55 million of cash and throughout the first three quarters of 2014 burned about $10 million of cash per quarter. At this rate, they would run out of cash somewhere in 1Q, 2016. The original hope was to complete the phase 2b trial in 2H, 2015 and with positive results, it would have been highly likely that they could have raised capital at a much higher price and/or bring in a partner to help finance the phase 3 trial. It now appears that they will have to rely on phase 2a data if they elect to raise capital and the price of the offering would be at a lower level. Originally, management wanted to wait for phase 2b data to enter into a partnering deal. They may now have to move sooner which would result in less lucrative upfront terms.

I still believe in the potential of Surfaxin and especially Aerosurf. I am very disappointed by the delay in the phase 2a and 2b trials as they were critical to my investment thesis for 2015. We are waiting until early 2015 when phase 2a results become available and possibly until 1H, 2016 when phase 2b topline results could be available. I think that the one case that I can make for a strong near term (within two years) move in the stock would be selling the Company. The Company currently has a market capitalization of about $132 million and assuming that they were to raise $25 million of equity this year that would bring the market capitalization to $157 million. Adding on the $30 million of debt owed to Deerfield Capital brings the enterprise value to $187 million in 2015. A 50% premium to the current price would be about $2.75 and a takeover price of $265 million. This seems pretty inexpensive for the potential value of Surfaxin and Aerosurf. However, I think that the chances for a sale of the Company are very small.

I recently recommended taking a tax loss on the stock. However, I could go back to a buy before the announcement of phase 2a results in early 2015. A signal of efficacy although not definitive, could cause a rally in the stock.

ImmunoCellular (IMUC, No Opinion, $0.75)

The Company carefully analyzed the results of the phase 2b trial of ICT-107 and has identified a sub-group of patients in that trial that appear to respond very well to the drug. These are HLA-2 status patients. In HLA-2 patients with methylated MGMT, there was a strong signal of activity and in unmethylated MMGM patients there also appears to be benefit.

The Company has gotten the approval of both the FDA and the European regulator, the EMA, to conduct a phase 3 trial of ICT-107 in HLA-2 patients. I believe that this trial has a good chance of being successful and providing validation to IMUC’s technology. The problem is that this trial could take three years to complete and cost $30 to $50 million. I am concerned that IMUC can raise the money for conducting this trial without enormous dilution to shareholders.

I remain interested in the Company. Interestingly enough, I think that IMUC’s outlook is tied to Northwest Biotherapeutics success. If NWBO is successful with its phase 3 trial of DCVax-L in 2015, it will validate the dendritic cell cancer vaccine technology and shone a spotlight on IMUC as being a major player in this space. This could result in an increase in stock price and easier access to capital or even an outright acquisition. While I remain interested in the stock, I am currently on the sidelines.

Inovio (INO, Hold, $9.01)

The lead product of Inovio’s immunotherapy technology platform is VGX-3100. It is based on two DNA plasmids that target and evoke immune responses to E6 and E7 oncogenes that are found in HPV 16 and HPV 18 viral types. These oncogenes are responsible for transforming HPV-infected cells into pre-cancerous and cancerous cells. VGX-3100 is injected into muscle (usually the arm) followed by electroporation using Inovio’s Cellectra device. It then triggers immune responses against cells expressing E6 and E7.

Data reported earlier this year from a phase 2 trial was very impressive as VGX-3100 reached the primary efficacy endpoint which was to cause regression of the disease from CIN2 or 3 to either CIN 1 or no disease at 36 weeks from the first treatment. On July 23, 2014 Inovio announced that on a per protocol basis the study had achieved this primary endpoint. CIN 2/3 resolved to CIN 1 or no disease in 53 of 107 (49.5%) women treated with VGX-3100 compared to 11 of 36 (30.6%) who received placebo. This difference was statistically significant (p<0.025). For more background on this trial refer to this report.

Inovio has now achieved credibility for its technology platform and also the financial strength ($101 million of cash at the end of 3Q, 2014) that moves it to a much higher stature in the emerging biotechnology world. Over time I think that this will draw in a new class of institutional investor that should put the stock in strong hands and make it less susceptible to the manipulation by short selling hedge funds. Inovio has been the subject of frequent attacks by Adam Feuerstein and friends.

This is definitely a stock that I want to stay involved with. I have felt for some time that immunotherapy will produce a paradigm shift in the treatment of cancer. Within the last year or so, Wall Street (after initial skepticism) has become very optimistic about immunotherapy although the focus has been on the checkpoint inhibitors of Merck’s (MRK) pembrolizumab and Bristol-Myers Squibb’s (BMY) nivolumab and Yervoy.

I think it is just a matter of time until attention begins to focus on interesting approaches from other companies such as Inovio, Northwest Biotherapeutics, Agenus (AGEN), Celldex and others. The innovations in immunotherapy likely will come from these small companies. BMY entered this area through the acquisition of Medarex and MRK followed with me-too drug development. The big companies are not risk takers and will wait to see which technologies work and then either acquires the innovator small company or try to copy its technology. I suspect that there will be numerous acquisitions of small immunotherapy companies in coming years if they show convincing proof of concept

Inovio now has about 65 million fully diluted shares so that at the current price of $8.90 the market capitalization is about $550 million. This suggests to me that the promise of VGX-3100 and Inovio’s technology base is reasonably well recognized. This coupled with the probability that top line results for a phase 3 trial of VGX-3100 is perhaps three years away tempers my enthusiasm for the stock at these levels. I am not recommending buying the stock at current levels as the upside potential seems limited.

 

 

 

 

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