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Expert Financial Analysis and Reporting

Northwest Biotherapeutics: The $40 Million Woodford Financing is A Major Positive (NWBO, Buy, $7.76)

  • The $40 million will fund the Company through the end of 2015.
  • CEO Linda Powers indicates that this is the cornerstone of the Company’s financing plans.
  • I am speculating that there will be as much as $60 million more capital raised this year that will take the Company well past topline DCVax-L data in 2016.
  • I believe this will be done using the Woodford connection; similar to the Woodward deals any stock offered will be put in strong hands with favorable terms. There are also possible financing mechanisms that may not require share issuance.
  • There will be no new supply  of shares coming into the US market for the hedge funds to use to put more shorts in place and the supply of stock for shorting is drying up.
  • I think that if I am correct, Northwest with the considerable help of Neil Woodford has turned the table on the shorts. We may see this year the long awaited short squeeze.

New Financing with Neil Woodford

Northwest Biotherapeutics announced on April 2 that it had entered into an agreement with Woodford Investment Management LLP for a financing of $40 million. Woodford will purchase $40 million of the Company’s common stock at $7.40 per share, for a total of 5,405,405 shares.  The purchase will take place in two closings, with $11.5 million closing on or before April 8, and the remaining $28.5 million closing on or before April 30.  There are no warrants, pre-emptive rights, or other rights or preferences.  There was no investment banker involved in the transaction.

Woodford previously purchased $25 million of the Company’s common stock in November 2014, 2014 on comparable terms. He has also made substantial purchases of the Company’s stock in the market.

CEO Linda Powers commented “We are very pleased to receive a further major investment from Neil Woodford as a cornerstone of NW Bio’s financing plans, keeping NW Bio at the forefront of the immuno-oncology space.”

Financing Has Been Difficult for Northwest

I think that this financing adds an important, positive element to the Northwest Biotherapeutics investment thesis. As I have discussed many times in the past, the Company has been financing under distress for the last three years. It was in severe financial distress in late 2011 as it ended the year with $24,000 of cash and liabilities of $52 million. The Company was teetering on the edge of bankruptcy.

Looking back, we can only be amazed that the Company has been able not only to survive but to fund a phase 3 trial of DCVax-L in glioblastoma multiforme. This is an extremely expensive trial that is enrolling 348 patients. Northwest has not commented on the cost of enrollment per patient. However, ImmunoCellular (IMUC) recently indicated to investors that the cost per patient for the planned phase 3 trial of its dendritic cell vaccine, ICT-107, in glioblastoma multiforme will be $100,000+ per patient.

Northwest is enrolling 348 patients in its phase 3 trial and has treated 51 patients in an information arm comprised of patients not eligible for the phase 3 due to rapid progression. If the cost is $100,000 per patient, the total cost will be about $40 million. In addition, it had to fund manufacturing facilities in the UK, Germany and the US. Autologous cell manufacturing facilities are expensive as they are dedicated facilities.

As we stand here in early 2015, the Company is progressing steadily toward completing enrollment in the 348 phase 3 trial. In addition, it has completed phase 1 for DCVax Direct and will be starting two randomized controlled phase 2 trials. It has more than doubled its manufacturing capacity in the US and has established the foundation for manufacturing in the UK and Germany. Few investors in late 2011 believed the Company would survive and to a person would be amazed at the current position.

Attacks from Hedge Funds Exacerbated the Situation

The overwhelming financial issues arising from these fundamental operations were compounded by ongoing savage attacks on the Company by hedge funds apparently working as a wolf pack. They were initially emboldened by general investor skepticism that cancer vaccines are effective. However, in the last year or so data from Celldex, Amgen, ImmunoCellular, Dendreon and Northwest has now provided strong signals that cancer vaccines do have biological activity. I believe that a group of hedge funds who often work in concert felt that the Company was both financially and fundamentally vulnerable and began to heavily short the stock, betting that they could probably drive the Company into bankruptcy and reap enormous profits.

There are about 10 million shares reported as shorted against NWBO, and an unknown number of naked shorts on top of that, estimated to be at least another 4 million or so. To the surprise of these short sellers, Northwest has been able to raise the funds needed to fund its operations and has also produced very promising clinical data on DCVax-L and DCVax Direct. However, it has been forced to scramble from one small deal to another virtually on a quarterly basis. There were five financings in 2012, three in 2013, three in 2014 and one so far in 2015. These have raised about $165 million in the aggregate.

Woodford Enters the Picture

Up until, 4Q, 2014 these deals were all done on terms that necessitated sharp discounts off closing prices and warrant coverage. Northwest was unable to attract significant amounts of capital from big institutions and was sometimes forced to deal with hedge funds. I believe that in some cases, these were part of the same group of funds who were shorting the stock. These funds would sell the shares accumulated in the offering to other funds in the group to cover short positions of those other funds. They would then short against the warrants.

This has been a nasty situation for shareholders. However, given the circumstances that I have described CEO Linda Powers had no alternatives and has done a magnificent job of bringing the Company to this point. Now, she has found her financial knight in shining armor with Neil Woodford. He has now bought $65 million of newly issued stock directly from the Company, with no warrants, at a premium to the market and with no investment banking fees, in addition to making large purchases of shares in the market, as shown on the website of his fund. The Woodford relationship has been amazingly positive for existing shareholders.

What About the Need for More Capital? Does Northwest Have An Ace Up Its Sleeve?

Northwest ended 2014 with $13 million of cash and has since added $40 million with the recent Woodford deal. In 2014, the quarterly cash burn was $13 million and if we use this as a proxy for spending in 2015, Northwest has funded itself through yearend 2015.

Hedge fund employees are already tweeting that Northwest will have to raise money and they are correct. However, I don’t think that they appreciate how CEO Linda Powers has now positioned the Company.  In the press release, she gave a hint at what is to come when she said that Neil Woodford is the cornerstone of the Company’s financing plans. A cornerstone is the stone at the base of two walls that form a structure which in this case is a financial structure. I think that Ms. Powers has already planned for these two walls that will for the first time ever put the Company in an extremely strong financial position.

Neil Woodford is acclaimed as one of the savviest investors in Europe and certainly has a clear understanding of the financial position and future cash needs of the Company. It is impossible for me to conceive that he has invested well over $65 million in Northwest on terms favorable to the Company with no thought as to how the Company is going to finance itself past year end.

Here is what I think could happen. The Woodford relationship has provided investment credibility and has funded cash needs for 2015. I speculate in coming months that we will see more creative financing on terms that are favorable to existing shareholders. If I were Ms. Powers, I would like to add up to another $60 million to the balance sheet. This would give the Company about $60 million to begin 2016 which could take it comfortably through 2016 and past the release of phase 3 data from the DCVax-L phase 3 trial and probably some data from the DCVax Direct phase 2 trials.

What Would I Do if I Were A Hedge Fund That Is Short the Stock?

I would be extremely nervous. I think that the hedge funds have been surprised at the promising data on DCVax-L and DCVax-Direct and were even more surprised by regulatory validation by the Paul Ehrlich Institute, the German equivalent to the FDA. The PEI has granted Hospital Exemption early access approval for DCVax-L to treat all forms of brain cancer before the completion of phase 3. The Company is also pursuing early access categories in the UK.

It was my expectation that these events would each drive the stock much higher and collectively much, much higher. Instead, each announcement created pressure on the stock. It is obvious to even casual observers that hedge funds that are short a stock when faced with good news that goes against their position step up their shorting; the intent is to make good news look like the market believes it is bad news.

This was made abundantly clear when the German approval was announced; this was one of the more strikingly positive news events in 2014 for emerging biotechnology companies. The news was announced after the close on March 10th. On March 11th, the stock opened at $8.29 and during morning trading hit an intraday high of $10.54. At about 1:00 PM Adam Feuerstein published a negative blog. He said that Northwest was misrepresenting the German news and that it was essentially just approval for compassionate use and meaningless. He cited this as another case of Northwest hyping their stock.

Over the course of March 10th through 12th, I estimate that nearly 5 million legitimate and naked shorts were put in place. Immediately after the Feuerstein blog and through the close on the afternoon alone, I estimate that nearly 2 million shares were shorted. It is difficult to imagine any legitimate reason to think that the German announcement could trigger such a shorting effort without a coordinated effort in the part of the hedge fund wolf pack.

The stock closed at $9.18 on March 11th and $7.99 on March 12th. The shorting broke the back of the rally as it was intended to do. However Feuerstein also launched more attacks on the Company in ensuing weeks and heavy shorting continued. By the close on April 16th, the stock was at $5.70 as compared to $6.85 on March 10th before the German announcement. The shorts were able to manipulate the price of the stock. By doing so, other investors were shaken and led to believe that the German news was bad news. This phenomenon of shorting against good news is not peculiar to Northwest. It is pervasive among small, emerging biotechnology stocks.

I think that the shorts were willing to make an extreme short bet against the Company because they felt they had an ace up their sleeve. That ace was the weak balance sheet of the Company. They felt that continual need for fund raising would put pressure on the stock. As importantly, the concern about these expected financings would keep other investors away.

Investment Significance of the Woodford Financing

The importance of the Woodford financings is that the hedge funds ace was just shot out of their hands:  there will be no new supply  of shares coming into the US market for the hedge funds to use to put more shorts in place. I think the hedge funds have been putting multiple shorts in place for each share of stock they are able to obtain or borrow – a negative multiplier effect.

However, the current supply of shares in the US has been exhausted, as reflected in the fact that large sums (up to 40% and more) have been offered to borrow Northwest shares for just a month, and the fact that brokers are actively telephoning even small individual Northwest shareholders seeking shares to be borrowed, has been reported by multiple shareholders on the message boards. These levels of payments and outreach efforts to find Northwest shares are unprecedented, as far as I am aware.  Against this backdrop, I think the hedge funds have been counting on Northwest doing additional financings that would deliver fresh supplies of shares and warrants to be used for shorting. Due to Woodford’s investment, this is not going to happen.

I think that Northwest has seen the last of the distressed small financings. In particular, I imagine that Northwest will take a more strategic approach to financings going forward, to continue to make little or no new shares available in the US market that can be used for shorting.  This will make the situation more and more difficult for the parties holding short positions.  If I am correct, there is a game plan to put the Company in a very strong capital position and will take away the financing overhang. This will likely induce other investors to come into the stock if they see a clear runway in which there are no financings needed to get through topline data on DCVax-L.

This is not a happy outcome for the hedge funds. They are extremely extended on their short position and have lost the ace they held. Will they double down again as has so often been the case? Perhaps, I have been amazed at how far they have stretched this bet. However, if they maintain their short position and if topline data is positive for DCVax-L in 1H, 2016, they could lose hundreds of millions of dollars. Northwest and Woodford may have turned the tables on the hedge funds.

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  1. Thank you for the excellent article Mister Smith 🙂

    Would it make sense to add the notion of borrowing costs for those HF’s playing the Short game? If so, would you have an estimate of that rate?

    Given the amount you indicate “There are about 10 million shares reported as shorted against NWBO, and an unknown number of naked shorts on top of that, estimated to be at least another 4 million or so. “, if borrowing costs apply in this situation, Shorts are also losing money on that side.

    Best regards

  2. Hi Larry,

    You mentioned that NWBO cash burn is 13 million a quarter. Per the last 10k, R&D was at 85 million for 2014, which alone puts the cash burn at more than 21 million a quarter last year. Am I misunderstanding what the R&D expense is relating to cash burn?

  3. If you go to the cash flow statement in the 2014 10-K the operational cash burn for all of 2014 was $54 million. Remember that part of R&D cost was paid in stock?

  4. Hi Larry thanks for your excellent due diligence! I was wondering if it would be beneficial for NWBO to list on the London and German exchanges simultaneously with Nasdaq?
    This could bring in investors where are product will be approved first. Furthermore wont the shares have to be accountes for… thus calling in the naked shares currently shorted but not borrowed.

  5. I have not thought about a European listing?

  6. HI Larry and Happy Easter and thank you for again explaining to me what this $$ raise means….

    I hope you are correct, of course, and now want to hear what Linda has to say in Wash. DC this Thurs….I also went to the AACR website and saw the MANY presentations and posters for ImmunTherapy and of course our 2….Interestingly, the “D” poster had quite of few names on it as being (co-authors or co-investigators, I really don’t know), but I would imagine it will be even more material or a confirmation of what Linda will present on Thurs…..Questions for you or anyone if you would be so kind when and if you want to respond???

    1. Are we covered by any Street Analyists???? or are all the “Big Boys” just bashing us??

    2. At one post you or someone said we might see some interim data on the phase II of
    “D” toward Sept. of this year because of dosing schedules….Now you said 2016??
    Could you clarify that??? I am hoping to see data on phase II before the end of ’15.

    3. Any chance of big $$ coming in through the announced collaboration that will made sometime before the end of ’15??? or do we pay someone to use their science????(I hope not)

    4. Could Germany give us some $$$ to begin “D” in Germany like it did for “L”?? Hope to
    hear that “D” is going to Germany before the end of ’15…..

    So, enough questions for now and I can’t wait to see what Linda reports on Thurs. and what the posters say on April 20th…..Cheers and Thanks….longnwbo

  7. 1. Not yet
    2. Interim data is based on a certain number of cancer progressions form both treatment arm and control arm. This is difficult to predict.
    3. Yes
    4. Not material

  8. Checked out the Woodford website which lists the Feb 28th CF Woodford Equity Income Fund holdings which shows NWBO as the 33rd largest position, accounting for .78% of the 5.06b Pound fund.

    Doing the math would indicate that in addition to the 4,317,790 shares in NWBO purchased in November, the fund had added an additional 3,950,000 shares via open market purchases as of the end of February. If there were 61m shares outstanding (my brokerage data) that would mean Woodford Fund owned just over 13% of NWBO. Including this issuance of 5.4m shares increases Woodford to 13.67m shares out of 66.4m bringing that percentage to 20.5% plus any additional open market purchases in March.

    This transaction probably moves NWBO up to around Woodford’s 25th largest position.

  9. The man seems serious. To take a position of this size without enormous conviction that there is a good probability of success would be lunacy. One would not expect lunacy from an investor with his credentials.

  10. Al Peinhardt says:

    Are the names of the hedge funds that are shorting known?

  11. A followup on my Woodford information post above. This morning Woodford published a blog post on their new “Patient Capital Trust” fund which they are upsizing.

    Given the timeline, it would seem to indicate that Woodford broke its investment in NWBO into two tranches so that the second tranche could be provided by the new fund. It would seem that NWBO will be one of that fund’s first investments and thus of disproportional importance to Woodford. Also, given that the new fund will be 500-800m British Pounds, $28m represents a much larger proportion of the fund than it would of the flagship fund.

    All in all, I take it as additional evidence that Woodford has a high degree of confidence in NWBO and they must be well aware of and willing to help NWBO battle Adam Feuestein and that group of hedge funds.


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