Expert Financial Analysis and Reporting

• Neil Woodford, a highly respected UK portfolio manager has just invested $25 million on very favorable terms and the Company has also received $10 million from a mortgage financing.
• This takes away the concern about financing that has been a lid on the stock.
• There is now a cash runway to see the Company through to the release of phase 3 results on DCVax-L in 2H, 2015 and completion of  phase 1 DCVax Direct trial in 1H, 2015.
• I see this as a significant catalyst for the stock.

$35 Million Capital Raise Strengthens Balance Sheet

Northwest announced after the market close on November 19^th that it had completed a deal with the United Kingdom money manager Woodford Equity Income Fund to raise $25 million and at the same time announced a $10 million mortgage on the Company’s recently acquired UK manufacturing facility. The $25 million raise was one of the more impressive for recently closed biotechnology deals as judged by its terms. The deal price was priced at $5.79 which was above the closing price of $5.14. There were no warrants issued and no investment banking discounts. Hence, the Company has added $35 million to its balance sheet.

What is the Woodford Equity Fund?

I did some googling to determine who Woodford Capital is. The Telegraph of London in an October 15, 2013 article discussed, Neil Woodford, the founder and his decision to leave Invesco as a portfolio manager and to set up his own firm. At Invesco, Mr. Woodford managed over $30 billion of funds. The Telegraph said “Neil Woodford is probably Britain's best known and most successful fund manager”. The Wall Street Journal on September 18, 2014 echoed this when it said “Neil Woodford is one of the U.K.’s highest-profile investors, is increasingly focusing on unlisted companies and start-ups, particularly in the healthcare sector, for the first fund run by his new asset management venture.”

The Telegraph reported that the Woodford fund was launched in mid-June with an initial £1.6 billion of assets. The intent of the fund is to have about 30% of the fund in health care. In August, Woodford reported that funds under management had grown to £2.68 billion and reported that the largest holding was Astra Zeneca which was 7.85% of the portfolio and the second largest holding was Glaxo at 6.45%. Mr. Woodford has most of his portfolio in a diversified, large capitalization names. However, he intends to invest about 7% to 10% of the portfolio in smaller emerging companies like Northwest although not necessarily in biotechnology. By November, funds under management had grown to £3.5 billion.

Mr. Woodford clearly has impact. In the recent Pfizer bid for Astra Zeneca he was acknowledged as one of Astra Zeneca’s staunchest defenders. His success and status suggests that many other investors, both in Europe and the US, watch what he is investing in. Northwest has had a spotlight shined upon it, which has the potential to attract other high quality investors. It may also be the case that his investment may cause top management at Astra Zeneca and Glaxo to ask their business development people to take a close look at Northwest.

Mr. Woodford did not explicitly state why he made the investment. I understand that he has taken a stake in ReNeuron, which is a stem cell therapy company. It appears that based on this and the Northwest investment that he is putting a small percentage of his portfolio into potentially paradigm changing technologies. This seems to signal an interest in emerging biotechnology companies with potentially paradigm changing technologies.

It may be no coincidence that his investment follows the announcement on September 17 that DCVax-L had become the first product to achieve a "Promising Innovative Medicine" (PIM) designation under the Early Access to Medicines Scheme (EAMS); this program was launched by the UK government in April 2014, and is designed to incentivize life sciences companies to speed up their regulatory applications and to make drugs available prior to completion of phase 3 clinical trials and regulatory approval.

The Cash Inflow is Well Timed and Strengthens the Balance Sheet

The 10-Q for the third quarter showed that Northwest ended the third quarter with only $1.4 million of cash. The company is spending very aggressively on funding the phase 3 trial of DCVax-L and the phase 1 trial of DCVax Direct. On top of this it invested nearly $21 million in production facilities in the third quarter, primarily to buy a manufacturing facility in the UK. This is intended to support the phase 3 clinical trial of DCVax-L in Europe, early access programs in the UK and Germany for DCVax-L and hopefully commercialization of DCVax-L in Europe.

On October 7, the Company raised $11.5 million in a convertible offering. This along with the $25 million rose from Woodruff and the $10 million on the mortgage bring the pro forma cash position as of the end of the third quarter to $47 million. I am guessing that the burn rate in coming quarters could be $12 to $15 million so that the Company has enough cash to see it through to 3Q, 2015. While this is not a robust balance sheet it should carry the Company through the release of phase 3 topline results for DCVax-L in 2H, 2015 and meaningful phase 1 results for DCVax Direct in 1H, 2015. There will be the need for more capital in late 2015. If the stock appreciates meaningfully warrant exercises could bring in upwards of $50 million.

Why This Capital Raise Could Be a Catalyst for the Stock

Some investors (usually those who are short the stock) claim that any equity offering is dilutive and bad for shareholders. However, emerging biotechnology companies must raise capital on an ongoing basis to fund the significant investment that must be incurred during the lengthy clinical development program. If they were not to raise capital, they would go bankrupt. There is sometimes the alternative of partnering, but funds received come at the price of giving up future profits and perhaps control of the product. In my view, partnering is often more dilutive than issuing equity. Hence capital raising is a fact of life for investing in biotechnology.

It is how equity is brought into a Company that determines how the deal affects current shareholders. There are times when an equity financing done on favorable terms can be a productive catalyst for the stock and I believe that this is the case for Northwest Biotherapeutics. To be sure, the announcement of an equity raise can put pressure on a stock in part because natural buyers may be taken out of the market to participate in the offering. Hedge funds often see this as an opportunity to aggressively short in the period before a deal hoping to drive the price down. Recognizing this, it is much better for shareholders if the deal can be completed before it is publicly announced as was the case here.

Northwest Biotherapeutics has been the subject of extensive shorting over the last year as short interest has increased to 8.1 million shares from 2.4 million. However, naked shorting which is a common trading practice directed against emerging biotechnology companies, probably added substantially more to shorting pressure. While not the only reason for the shorting, one of the major factors has been the weakness of the balance sheet. I think that many shorts felt that Northwest would be forced into a distressed financing before yearend. Their belief was that the prospect of an offering would keep a lid on the stock and that the announcement of an equity offering would put pressure on the stock and drive down the price. The plan may have been to cover their positions through participating in the equity offering.

I think that the financing lid on the stock has overshadowed the significant clinical progress of the company in 2014. The phase 3 trial of DCVax-L is scheduled to report topline results in 2H, 2015 and the phase 1 trial of DCVax Direct will report results in 1H, 2015. Moreover, the designation of DCVax-L  as a Promising Innovative Medicine in the UK and the approval of DCVax-L under the German early access hospital exemption early access programs have been extremely strong validations of the promise of DCVax-L technology and the hope that the phase 3 trial can potentially succeed.

This stream of events should have given pause to short sellers if it were not for the expectation that an equity deal would put further pressure on the stock. This unanticipated equity offering pulls the rug out from under a key part of the short strategy. From a long position the equity offering has somewhat de-risked the stock, but from the short position it has enhanced risk. Their bet now is that the DCVax-L trial will fail and the DCVax Direct data will be disappointing. They must also be wrinkling their brow over what the UK and German regulators saw in the data to move to give DCVax-L early access to the market. Adding to the risk is that the Woodruff investment could cause both European and US investors to take Northwest seriously and potentially lead to significant new buying. Again the risk profile for shorts is enhanced and they have to be concerned about a short squeeze given how extended they are.

Some Thoughts on the DCVax-L Phase 3 Trial and the Phase 1 DCVax Direct Trials

In regard to the DCVax-L phase 3 trial, I would call your attention to a very well-reasoned piece of research published recently by Steve Giordano in a Seeking Alpha article. I would urge you to read the article in which Steve makes a projection on the potential outcome of the phase 3 trial. I will not attempt to go through his article, but it is must read for anyone interested in Northwest. Steve bases his analysis on some reasonable assumptions. In this trial, DCVax-L is compared to the standard of care for glioblastoma multiforme. The endpoint of the trial is progression free survival and several recent clinical trials have shown that PFS for standard of care is reliably 6 to 7 months.

The clinical trial of DCVax-L is blinded so that we cannot determine the results for DCVax-L or standard of care until the end of the trial. However, there are certain interim points in the trial in which what the number of patient who have experienced progression (those on both drug and standard of care) is known. At those points, knowing the highly likely outcome for standard of care, we can back out progression free survival estimates for DCVax-L. Steve assumed that standard of care would lead to progression free survival of 9 months and his analysis then concluded that progression free survival for DCVax-L in the phase 3 trial could come in at 24 months.

I can’t really do justice to Steve’s analysis and I suggest that investor carefully go over his methodology. To increase confidence in his approach, he hired an expert biostatistician to go over his statistical assessment and validate the statistical analysis he used. There is much that can go awry in a clinical trial relative to expectations and it may be that Steve’s assumptions prove wrong. However, it is a well-reasoned approach. I would also point out that in the phase 1/2 trial of DCVax-L the progression free survival was also 24.0 months.

So what would be the significance if the difference is progression free survival is 15.0 months (24.0 minus 9.0)? The trial is powered to produce a p value of 0.02 if the difference is only 4.0 months. Hence the result would be highly statistically significant. Many bright investors have been humbled by attempts to predict the outcome of a phase 3 trial, but there certainly seems to be reason to hope for a successful outcome. This would be a crushing blow for the overextended shorts.

DCVax Direct is the emerging second leg to the investment case for Northwest. It is in a phase 1 trial but interim results suggest that it may have activity in a number of solid tumors in which the tumors are inoperable. Early reports on three patients in the trial have shown tumor shrinkage in end stage pancreatic, sarcoma and ovarian cancer patients. These patients had failed all other approved treatment regimens.

Investigators from MD Anderson and UCLA recently published an encouraging poster on DCVax Direct. The great challenge for immuno-oncology drugs is that tumors can evolve mechanisms that enable them to block or escape the immune response. One of the major arguments against cancer vaccines has been that they can’t overcome the immuno-suppressive effects of tumors in order to create an immune response.

Importantly, the authors of this paper concluded that DCVax Direct can overcome the ability of the tumor to block the immune response and make the tumor susceptible to the immune system. Imaging scans and biopsies, according to the investigators, show that DCVax Direct causes substantial infiltration of immune cells into the tumor which indicates that it is stimulating an immune response against the cancer. They further concluded that DCVax Direct is causing tumor cells to die and noted that some biopsies actually showed no live tumor cells. They also stated that injections into one local tumor mass (as was the protocol in this trial) were able to have an effect not only at the site of injection but also on metastases. This poster substantiates that DCVax Direct is causing a strong immune response that results in systemic effects against the tumor. This is very important.

We are likely to see further interim analysis for the phase1 portion of DCVax Direct trial in the next several quarters. The phase 1 portion of the trial will complete treatment of 36 patients in 1Q, 2015. However, the design of the trial allows the phase 2 portion in 24 patients to begin before the phase 1 is completed. Northwest will announce the trial design in coming months and the disease target. This also has the potential to create investor enthusiasm and anxiety for shorts.