Expert Financial Analysis and Reporting

Investment Summary
Northwest Biotherapeutics’ (NWBOD) stock price increased 94% on Friday, September 28 to $10.95 per share and investors are asking what happened. There was certainly a short squeeze on Friday, but I don’t think that was the sole reason. Northwest has traded under $1.00 for a very long time and this has prevented many brokers and money managers from investing. They have been intrigued by the fundamentals of the story but stocks selling below $1.00 are considered unsuitable for many customers. I think that the reverse stock split unleashed significant pent-up demand by taking away this obstacle and combined with the short squeeze to cause a perfect storm.

The next question being asked is what do I do with the stock at this price? To try to answer this question, I have gone through some calculations to determine the market capitalization of Northwest and compare it to its direct peer company ImmunoCellular (IMUC) and three other emerging comparable companies: Sunesis (SNSS), Synta (SNTA) and Threshold (THLD). All three of these companies are oncology companies with lead drugs at a similar stage of development. In my view Northwest matches up favorably to these companies on promise of the clinical data, potential commercial opportunity and promise of the pipeline. Each of these companies has fully diluted market capitalizations of over $450 million.

In this report, I estimate that after the completion of a planned 25 million stock offering, NWBOD will have 20.8 million shares outstanding. At a price of $10.75, the market capitalization would be $224 million. The directly comparable company ImmunoCellular has just filed a $50 million shelf registration and based on an analysis of its cash position, I estimate that it may soon undertake a $25 million offering. This could bring its post-offering share count to 70 million shares so that at its current price of $2.80 it would have a market capitalization of $196 million.

Northwest and ImmunoCellular, by my analysis, have roughly the same prospective post offering market capitalizations. Selling at about half the market capitalization, both appear to be attractively priced in comparison to the better known oncology companies Sunesis, Synta and Threshold. I think this is in large part due to the lack of coverage of NWBOD and IMUC that has largely been a factor of their bulletin board trading status and consequent lack of analyst attention; this appears to be changing.

I think that almost everyone, including me, feels that the stock will trade down from $10.95. However, the market sometimes acts completely opposite of what the consensus thinks. I would remind investors that Linda Powers and her investment funds own just under 50% of the stock and that many investors closely aligned with management through participation in the many small fund raisings the company has done own a significant amount of stock. There is a lot of stock tied up in loyal, secure hands.

It is hard to judge the position of the shorts and their appetite for hanging in there after the beating that was suffered last Friday. There are likely some remaining short positions that are seriously underwater. It is not an easy decision for shorts sitting on sizable losses to increase their positions and some might cover. I also think that there will be considerable buying from brokers and small institutions for reasons just discussed.. Somewhat longer term (the second half of October) the equity offering may bring in some large institutions who may continue to build positions in the aftermarket. We might be surprised at how much demand could be generated by these forces.

My best judgment is that NWBOD will give up some of its huge price surge in coming days. I suspect that some investors won’t be able to avoid the temptation to take profits. However, as I have pointed out, even with this run-up in stock price, NWBOD appears to be reasonably or attractively priced in relation to its peers. I intend to ride through whatever downside may occur as opposed to trying to trade out and back in.

Short Squeeze on Friday
Northwest Biotherapeutics enjoyed a 94% increase in price on Friday to $10.95. A major contributing factor was a short squeeze. Brokerage firms true up their books at the end of a quarter and regulatory requirements mandate that they issue margin calls at the end of a quarter. If the investors (shorts in this case) cannot come up with the margin, the brokerage firms can and will pay any price to cover the short.

Shorts appear to have been caught asleep at the throttle on this situation. It has been easy to make money on the short side in emerging biotechnology companies for several years. Shorts bet that most clinical trials for the smaller companies will fail and that even if the trial is successful the FDA will issue a Complete Response Letter. Complementing this strategy is the empirical experience that small companies announcing that they will be doing equity offerings invariably trade down. The same holds for reverse stock splits. This has been a repeatable formula for success and it has led to cockiness on the part of some shorts.

NWBO fit this short scenario to a tee. The company announced in a June 2012, S-1 statement that it would be raising $25 million and doing a reverse stock split. For many shorts, this scenario looked like an easy way to make a quick buck. There was a great deal of shorting in the $4 to $5 area.

Looking at Shares Outstanding for Northwest and Market Capitalization
Companies should be valued on market capitalization which is stock price multiplied by number of shares outstanding. Using stock price alone misses a critical element in the equation and is relatively meaningless. In my initiation report of July 19, 2012 called Northwest Biotherapeutics' DC Vax Cancer Vaccine May Be a Game Changer In Cancer Therapy, I calculated that NWBO had 10.4 million shares outstanding, 1.4 million options and 5.0 million warrants (each of these is adjusted for the 1 for 16 reverse split). Assuming that all of these options and warrants are exercised, there would be 16.8 million fully diluted shares after the reverse stock split.

The company also has stated that it wanted to retire $17 million of outstanding short term debt. Originally, the plan was to retire a good part of this debt by converting it into equity. NWBO may now have the option of using proceeds from the conversion of warrants and options to repay some of this debt. Of course, not all options and warrants will be exercised and not all debt will be converted, but for the sake of this exercise that they are. I estimate that the weighted average exercise price of the warrants and options is about $7.50.

The exercise of all 6.4 million warrants and options at $7.50 ($0.47 on the old shares) would raise $48 million and retire all of the short term debt without increasing the fully diluted share count. There are a number of potential inaccuracies in this calculation. The $7.50 price of conversion is a rough estimate. Also, not all of the options and warrants will be converted and potentially not all of the short term debt will be converted. If the company retired all of the short term debt by converting it into equity at a price of $7.50 (an arbitrary price) it would need to issue 2.3 million shares. By these calculations, in the best case there could be no shares issued to retire the debt and in the worst case, there could be 2.3 million. For the sake of this calculation, let’s take the average or 1.2 million shares. With all of these assumptions, there would be 18 million shares outstanding before accounting for shares that will be issued in the planned $25 million offering.

If the offering is done at $10.75 per share, there would be 2.3 million shares issued and at $7.50 there would be 3.3 million. Let’s take the middle ground and assume that 2.8 million shares are issued. This would bring the fully diluted share count to about 20.8 million shares after the offering.

How Might Northwest’s Market Capitalization Compare to ImmunoCellular
Based on my fully diluted share count estimates, if the stock price of Northwest after the offering is $10.95, the market capitalization would be roughly $228 million (20.8 million shares x $10.95). There would be no debt. How does this compare to its closest peer company ImmunoCellular?

IMUC has 39 million shares outstanding and 22 million warrants giving it a fully diluted share count of 61 million shares. However, it is cash strapped with less than $10 million of cash. It filed an S-3 shelf registration on September 21 for $50 million. I think that IMUC may need to raise about $25 million and if this is done at $2.80, would result in 9 million shares being issued. After this potential equity offering, ImmunoCellular would have 70 million fully diluted shares and at a price of $2.80 would have a market capitalization of $196 million.