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Expert Financial Analysis and Reporting

San Francisco Trip Is the Basis for a Preview of 2014 (Subscribers Only)

What SmithOnStocks Is All About
It is traditional at the start of the year to go over stock picks for the coming year. It also is the time of the annual biotech “love in” in San Francisco, which I recently attended and that attracts some 30,000 biotech executives, analysts, venture capitalists and investors. I estimate that there may have been representatives from 300 or more biotech companies in town. Many companies presented at one of three conferences-JP Morgan, Biotech Showcase and OneMedForum. Also, many companies rented suites at hotels to hold one on one meetings. Hence, there was a lot of news flow.

I had meetings with 20 companies in 13 different hotels and also attended presentations at the conferences. Downtown San Francisco is actually a small area and I could walk to each of my appointments. This is a great feature of the city. San Francisco was a whirlwind for me and it provides the basis for a lot of upcoming research reports in which I update current recommendations and present information on companies that may be the basis for future recommendations. However, I also wanted to discuss my analytical approach and investment style. If you are only interested in my view on stocks, you can skip to that section of the report.

If you are a subscriber to SmithOnStocks, in order to put my comments in perspective you have to know where I am coming from. What do I look for in deciding to follow, write up and recommend a stock? I have a methodical approach and I thought I would take this opportunity to describe it to you.

I would emphasize that one of my principal objectives is to give subscribers and readers sufficient information, that when combined with their own due diligence, allows them to form an independent judgment. I have my opinions and go to great lengths to apprise you of the positives and negatives that I have weighed to reach an investment decision. However, it is your money and ultimately it should be your own informed judgment on whether to invest.

How I May Differ from Other Biotechnology Bloggers
I believe that one of the points that differentiates my work from others who blog about biotechnology is that with very rare exceptions, I only work with companies with whom I have a good relationship with the CEO and other top members of management. I require the same level of access that is given to Wall Street analysts and key investors; I think that it is difficult for others who write blogs to attain this. I can’t understand a company by just reading its press releases. I have to understand the thinking of the people who are managing the company and to draw on their in-depth knowledge and experience.

Because of my long history in the biotechnology industry, I have known many companies and their management for some years. In my work history before I started blogging about two years ago, I called personally on over 150 biotechnology companies and have seen even more present at conferences. Hence, I had varying degrees of prior experience with each of the companies that I saw in San Francisco. I had seen each at least once in the past and some I have called on for up to five or more years and have seen them several times a year in conferences or in person. This is important because it gives me perspective. I have seen the ups and downs which befall all biotechnology companies. Again, I think this is a distinguishing feature as I am not making judgments based on first impressions.

My Stock Selection Approach Starts with Understanding the Company
The first thing that I focus on is the technology (s) of a company. I try to understand the basic biology of the disease targets and how drugs that companies are developing affect that disease. I also try to understand competitive drugs using a similar or different technology, whether they are already marketed or are in development. This sometimes involves getting to understand the drug’s effect at the cellular level. This can be incredibly complex and I usually don’t understand the intricacies that only skilled researchers can truly appreciate. I try to get an idea of the general drug development goals and the issues that will determine success and listen to the opinion of those who are more knowledgeable. However, opinions can vary widely. I sometimes find that two experts in a room have five different opinions.

The next step involves analyzing the clinical development strategy and the timelines and design of the clinical trials. It is not infrequent that drugs which are eventually shown to be effective can have disappointing trial results due to the design and execution of the trial. This can lead to regulatory delays that slow development by several years and create significant disappointment for the stock, but it can also create opportunity. We have recently seen this with Acadia (ACAD)and Neurocrine (NBIX) whose stocks were seriously impacted after disappointing phase II or III results, but went on to spectacular upside moves when subsequent trials produced encouraging results.

It is important to understand the endpoints or goals of the trial and how difficult they may be to achieve. For some drugs such as antibiotics, the goal is relatively straightforward as it is dependent on the infection being eliminated or controlled. In other diseases like pain and depression, the endpoints are more amorphous and are based on more subjective measures. Investors have to understand what constitutes success in a trial.

The clinical trials also have to show that there is a meaningful difference for the drug being studied from either an existing drug used to treat the disease or a placebo. To do this, the data sets from a group of patients who receive the drug and others who receive another drug or placebo are compared. The statistical analysis starts with the hypothesis that the comparator drug or placebo as the case may be, has the same effect as the study drug. The statistical aim is to try to show that this hypothesis is false and that there is a difference; this is called the null hypothesis.

The p value is the probability that the effect of the drug and its control arm, whether another drug or placebo, are the same. The generally accepted standard for success in a clinical trial is a p value of 0.05 or less which means that the probability that they are the same is less than 5 in 100. There are also many nuances in statistical analysis and although I have had courses in statistics , l am often baffled by the intricacies. Anyway, the company and the FDA have to agree on a statistical plan and the company has to achieve that plan to gain approval for the drug.

Companies may announce that they have met success in their clinical trial, but it doesn’t necessarily mean that the drug will be approved. There is always the room for disagreement on what the results actually show. Regulatory agencies always take a critical look at how the trial was conducted and analyzed and may come to a different conclusion from the Company. Also regulators can be fickle and without forewarning may consider issues not adequately anticipated and addressed by the Company to be show stoppers.

The approval of a product, while a momentous event, does not mean that the product will be commercially successful. The marketing process is expensive and requires considerable skill in positioning the product in the market. The rise of managed care means that companies have to demonstrate that a product is not only clinically effective, but also that it is also cost effective. Managed care often looks at new drugs as costs rather than emphasizing the clinical efficacy. Also, greater caution by doctors in adopting new products has made new product launches more difficult. Many recent new product launches have been disappointing relative to expectations in the first year or two of launch even if they are ultimately successful. Cadence’s Ofirmev comes to mind.

Small companies have to decide whether to market the drug themselves or to license the drug or partner with a larger partner. This is determined by the sales effort required to sell a new product and the financial situation of the Company. For products which are primarily marketed to a relatively small group of doctors, small companies can sometimes market on their own. Other drugs require the large sales forces of big pharma and big biotech to reach target audiences.

There seems to be a feeling among investors that licensing a product de-risks the commercialization process and is not dilutive. I agree on the first part, but I think that licensing and partnering are often times more dilutive than raising capital to market the product. Bringing in a partner can reduce ultimate profit potential by 50% or more and control of the product is transferred to a less intensely interested partner. I often favor companies that can commercialize products on their own.

My Asymmetric Investing Strategy
Investing in emerging biotechnologies is high risk. There are any number of ways that companies can stumble in the process of developing and commercializing a drug. The most common, of course, is a failure in clinical trials. I have seen estimates that 50% of late stage phase IIb and III clinical trials that are intended to show proof of concept and pave the way to regulatory approval, fail. Hence biotechnology investing requires a strategy that takes into account the frequency of clinical trial failures.

I call my approach asymmetric investing which is based on the observation that some hedge funds have made enormous returns by looking for asymmetric investment opportunities. These stem from finding upcoming events that are not well understood and which have the potential to cause dramatic stock movements in the case of a positive outcome. The chance for such a positive outcome may be modest, but if it does occur the potential reward dramatically offsets the risk of being wrong. Perhaps the upside opportunity is a several fold increase in the stock price and the downside is often losing 50% or more of one’s money. Critical to this approach is that one winner may potentially offset several losers.

These characteristics are similar to an option, but have the advantage that there is much less of a time element. One can be right on thinking that leads to an option investment and still lose all or much of one’s money if the option expires prior to an anticipated event. Asymmetric investing is not devoid of time risk, but it is much less than with an option.

For an asymmetric opportunity to exist there has to be lack of awareness or extreme skepticism that a positive outcome can occur. Small biotechnology companies fit this approach because most Wall Street analyst coverage in biotechnology is focused on larger biotechnology names that are earnings driven. In addition, the large number of trial failures conducted by small biotechnology companies has produced a pervasive skepticism as to whether any clinical trials will succeed. Asymmetric investing does not mean that an investor is smart enough to predict with certainty clinical trial outcomes. The premise is that the event has a reasonable chance of occurring, is unexpected, and if it does occur the upside potential dramatically offsets the risk of losing much or all of the investment if the outcome is negative.

The other key part of my strategy is diversification. In this report I write about seven stocks that I am currently recommending. These are alphabetically Antares (ATRS), Cadence (CADX), Cytokinetics (CYTK), Discovery Laboratories (DSCO), Neuralstem (CUR), Northwest Biotherapeutics (NWBO) and Repligen (RGEN). I believe that each of these companies has the potential to be a great investment, but experience tells me that some will run into problems and their stocks will react quite negatively. My experience is that one winner can offset two or three losers.

In my own portfolio, I use emerging biotechnology as a high beta component. It is about 15% of the portfolio and I am invested in the seven above names. A problem with any one stock wouldn’t lead to an impact on my portfolio that would cause me emotional distress and yet in the aggregate my biotechnology selections have the potential to meaningfully affect my portfolio. Remember, one winner may offset multiple losers.

Companies That Interest Me
I group companies that I am involved with into several broad categories. The first is what I call the paradigm changers. These are companies that are pushing the edge of the envelope in such fields as gene therapy, stem cell therapy and certain areas of immunology such as cancer vaccines. Drug development is almost always undertaken in these areas by small entrepreneurial firms.

Larger pharma and biotech companies tend to be more risk adverse and concentrate their development in more proven areas. They usually leave paradigm changing drug development efforts to smaller companies and then much later start development after the technology approach has been proven or they just acquire the smaller companies. Using an analogy to the oil industry, you can think of the small biotechnology companies as wildcatters.

A second group of companies are those with more conventional drug development efforts that are focused on novel new molecules. A third group are those that have taken proven, generic drugs and found new dosage forms or new uses for them. And finally, there are special situations that don’t fall in the above groupings.

One of the most perplexing things for me and other investors is that there has been an explosion of companies. There were probably 300 or more biotechnology companies in San Francisco this past week. I know I can’t and I don’t believe anyone else is capable of understanding each of these companies. It is just overwhelming. What I try to do is catch as many as I can, but it takes me several weeks or months to research a new company and hence my bandwidth is limited. I hope that I don’t offend any female readers by saying that I can’t dance with all the pretty girls.

I am constantly looking for new ideas and the abundance of biotech companies means that there are always lots of existing companies to sort through and there has recently been a strong flow of initial public offerings. There is a lot on my plate.

Paradigm Changers Attract Me
This is the riskiest type of investment in which development timelines are long and the failure rate is high. However, the rewards for success are astronomical and I go out of my way to find such companies. Let me give you the example of monoclonal antibodies. In 1975, Milstein and Kohler developed the hybridoma technique for making monoclonal antibodies. This led to the creation of companies formed to exploit this discovery.

None of the major pharmaceutical companies beleived that the technology would work so development fell to small companies. The early leader was Hybritech and I called on that company in 1981. I was super excited by the potential. Skeptics abounded who were absolutely convinced that this technology would either not work or that the development timelines were so long that they were not viable investments. For nearly two decades the skeptics and the cautious approach of the big pharma companies seemed the correct approach. It was not until 1999 that Idec launched Rituxan, the first monoclonal antibody product that was a major commercial success and whose current sales are about $8 billion.

Being correct on one drug like Rituxan can be enormously rewarding. The success of Rituxan led to the merger of Idec with Biogen (BIIB) in 2003 with Idec shareholder receiving just over 50% of the shares in the combined companies. Currently, BIIB has a market capitalization of $70 billion. I estimate that $1,000 invested in IDEC in 1998 would be worth over $10 million today if the stock was held continuously. Obviously, there are a lot of other things going on at BIIB that affect its value and this is not all attributable to Rituxan, but this is the brass ring that we are searching for when we invest in paradigm changing companies.

The technologies that overcame the development challenges and led to the development of Rituxan unlocked the door for other product development efforts. Today, over 30 years after I first called on Hybritech, monoclonal antibodies are a $57 billion global product category that is growing at 9% or more per year; there are about 35 approved products and it is an area of intensive research interest as there are estimated to be 350 new products in development. Six of the ten best selling drugs in the world in 2013 were monoclonal antibodies and included Enbrel, Remicade, Rituxan and Avastin. Monoclonal antibodies sales are responsible for 33% of the $160 billion global biologics market. Only within the last five to ten years did large pharma companies like Merck and Pfizer take an interest in monoclonal antibodies.

So I was in San Francisco to see paradigm shifting companies. I see the potential for gene therapy, stem cells and immuno-therapy (cancer vaccines) to have the same disruptive effect on the pharmaceutical industry in the next two decades as monoclonal antibodies. Will we have to wait 20 years for a success as in case of Rituxan? Maybe not. I would point out that there has been a lot of work in these technologies over the last two decades and if we look at them in the context of Hybritech in 1981 and Rituxan in 1999, we may be at the same point as Rituxan in 1995 or 1996. Put another way, we may be close to commercialization of the first pioneer products in gene therapy, stem cells and cancer vaccines. Actually, the first gene therapy product was just introduced in Europe and the cancer vaccine Provenge was approved two years ago in the US.

So one of the things I did in San Francisco was to focus on the paradigm changers. I met with such companies as Neuralstem (CUR), Northwest Biotherapeutics (NWBO), Sangamo (SGMO), Inovio (INO) and NeoStem (NBS). There are many emerging companies that can be paradigm changers I am currently recommending Neuralstem and Northwest Biotherapeutics because I came across them and they caught my interest. I don’t claim that they are the only or best investment opportunities; there are almost certainly other promising situations that I have not yet had time to analyze.

My Investment Style; I Am Not A Trader
I have been an investor in the stock market for over 30 years. One of the things that I firmly have come to believe is that the current price placed on a stock can be wildly out of line with its long term prospects, especially in biotechnology.

I am often asked what my one year price target for a stock is and the methodology that I use to arrive at it. Many Wall Street analysts use a discounted cash flow model looking out over several years to arrive at a price target; in fact most brokerage firms require their analysts to do this. I find this virtually useless as small changes in sales assumptions or the discount rate used can lead to highly divergent net present values.

My preference for setting a price target is to project how the Company may be viewed in a few years if I am reasonably correct in gauging the potential of its products. I then consider how companies that are currently at a comparable stage of development are priced, with an emphasis on multiple of sales. Earnings of emerging biotechnology companies are less predictive of value as heavy investment spending on research or commercialization can mask the true earnings power. I rely on multiples of sales to judge how the market may choose to value a stock in the future.

While my focus on the investment thesis is long term, I recognize that there can be wide fluctuations in price in shorter time frames. I am looking to buy at near term lows and try to avoid buying at highs. I believe that in the shorter time frame of months or a year or two, the direction of the stock is most dependent on the trend of the market and whether the fundamentals of the company are perceived to be weakening or strengthening. I get nervous about adding to positions when stocks that I like have sharp upward moves and greedy if they have price weakness. I don’t just focus blindly on long term prospects.

While I have near term price sensitivity in initiating and adding to positions, I am reluctant to trade in and out of stocks. It is my experience that trading is a losing strategy. Why? Human beings find comfort in being accepted and part of the crowd. We tend to do what others are doing. For example, if you and I were sitting in a dark, crowded movie theater and I decided to yell fire, within a short time many others would be yelling fire and most of the people in the audience would believe there was a fire. The same holds for traders. They tend to respond to emotion so that when there is strong positive sentiment on a stock and prices are driven to highs they are buying and when there is strong negative sentiment they are selling. Also, if investors make a mistake and the stock goes against their trade, they are reluctant to admit the mistake and move in the other direction. This can result in missing the really big stocks whose prices rise over several years.

My time frame for stocks may be longer than most. Probably the majority of investors have only been involved with the stock market for the last fifteen years or so and many adhere to the current popular trading strategy in which one buys a stock and if it rallies 20% or 30% you sell it. The Fast Money show on the CNBC business channel epitomizes this approach. Participants can change their opinion overnight and seem to be relying primarily on recent price movements to make their buy or sell recommendations. They have little recollection or appreciation for secular bull market as was seen in the 1982 to 2000 period or other times in the past.

I think that the stock market is a winner’s game in which everyone can win as opposed to a zero sums game in which one person wins at the expense of someone else-essentially the trading strategy. One of the formative experiences in my life was a recommendation that I made early in my career on Marion Laboratories. I recommended the stock for eight consecutive years and the stock went from $1 to $48. There were times when the stock overshot and corrected but I kept my focus on the long term. The example of Rituxan and Idec reinforces my view that this is this style of investing that leads to investment success. Warren Buffett and I stand shoulder to shoulder on this concept.

Updates on my Buy Recommendations

One of the objectives of San Francisco was to meet with managements and update some of my buy recommendations. I remain positive on seven such companies that I met with. These are in alphabetical order: Antares (ATRS), Cadence (CADX), Cytokinetics (CYTK), Discovery Laboratories (DSCO), Neuralstem (CUR), Northwest Biotherapeutics (NWBO) and Repligen (RGEN). I have also recommended Northwest Biotherapeutics recently as a trading opportunity within the context of my long term recommendation on the basis of potential approval of DCVax-L for compassionate use in Germany.

Northwest Biotherapeutics (NWBO)
I listened to a presentation that CEO Linda Powers made and then attended a breakout session. She focused on some of the details of the phase III trial of DCVax-L and manufacturing issues. There has been a lot of concern about this trial because of the disappointment of ImmunoCellular’s (IMUC) phase II trial of ICT-107. I think that the ICT-107 trial was an attempt to hit a homerun and that the Company set expectations way too high. I think the DCVax-L trial is better planned and powered and has a good chance for success.

The ICT-107 trial enrolled about 127 patients and was powered to show a 9 month improvement in overall survival which is estimated to be 18 months for standard of care. In other words, they were looking for about 27 months of median overall survival. In its phase I trials, the median overall survival was in excess of 36 months. Some of my contacts felt that the ICT-107 trial was underpowered and would not reach its endpoint. You may recall that I wrote a report on December 16, 2013 in which I said that the most likely outcome was that the trial would not meet its primary endpoint of median overall survival, but the data would be encouraging enough to undertake a phase II trial. This is what happened.

The phase III trial of DCVax-L will enroll about 310 patients. The trial is much larger and better powered than the ICT-107 trial and the endpoint is progression free survival with a secondary endpoint of median overall survival. The assumption is that DCVax-L will increase progression free survival by 13 months which is 6 months greater than the 7 months that is estimated for standard of care. DCVax-L in its phase I trial increased progression free survival by 24 months.

The phase III trial is powered on the basis of 110 events occurring. An event can be either progression of the disease or death. The first interim look that is now taking place is based on reaching 60% of events or 66 events. The Data Monitoring Board will look at the data to determine if there are any safety issues or if the trial has successfully reached the primary endpoint; the Company and all others are blinded to the results. The overwhelming probability, 99.9%, is that the DMB will simply recommend that the trial continue. There will be another interim look when 80% of events or 88 events have occurred. The final look is when 110 events have occurred and that will probably be in early 2015. That is the moment of truth.

The trial for NWBO’s second product in clinical trials, DCVax Direct, is unblinded. This means that there could be comments on any treated patient at any time. Hence, there is the possibility of hearing patient outcomes on a piecemeal basis throughout 1H, 2014 and beyond. In regard to DCVax Direct, I think that I have previously underestimated the amount of information that will come out of the 60 patient phase I trial. We should be hoping to see some shrinkage of tumors which would provide a signal that could encourage a phase IIb trial. Remember that patients in this trial have inoperable tumors and very poor prognoses.

Animal results for DCVax Direct were spectacular, although we all know that these are not always predictive of outcome in humans. They showed that in animal models in which tumors were completely eradicated, the subsequent re-inoculation of the animal with the same tumor cells did not result in the cancer returning. This suggests that the animals were effectively vaccinated against the tumor; they developed immune memory. Such results in humans would be stunning.

At the Oppenheimer conference in December, Linda Powers said that we should stay tuned for further information on approval in Germany for compassionate use (it is actually somewhat different than what we in the US think of as compassionate use). For various reasons I think that this will have a dramatically positive impact on the stock. If you are a trader, you might want to speculate on this occurring in the next month or two. I think it could cause a sharp upward move in the stock.

Cytokinetics (CYTK)
I met with the CEO Robert Blum. I have followed this company for over ten years and have written extensively about it for the last year. I plan to do a more extensive write-up on the meeting.

The Company has two huge binary events in 2014 with the reporting of phase IIb data for the COSMIC-HF trial of omecamtiv mecarbil in congestive heart failure (late 2014 or possibly early 2015) and the reporting of the phase IIb BENEFIT-ALS trial of tirasemtiv in ALS (probably in April 2014). These are two drugs with huge commercial potential. At a market capitalization of less than $350 million, success in just one of these trials could double or perhaps triple the stock. Success in both trials could-well you make up a multiple of current market capitalization.

I spent a large part of the interview going over the design of the COSMIC-HF trial. This trial will enroll about 450 patients who will be treated for 20 weeks. The primary endpoints are safety, tolerability and pharmacokinetics, particularly blood levels. There will be wealth of information gathered in secondary endpoints that include change in systolic ejection time from baseline, stroke volume, left ventricular end systolic diameter, heart rate and N-terminal pro-brain natriuretic peptide.

This trial will not provide significant data on likely endpoints for a phase III trial which will probably be overall survival and/or hospital readmissions. It likely would take thousands of patients to have the statistical power to show significance with these endpoints. However, the trial will contain an enormous amount of data that will provide deep insight into how effective the drug is on key body parameters that are indicators of improvement in heart failure.

The trial results will be very meaningful, but there could be some negativism because the trial does not give a clear answer on the effect of omecamtiv on key endpoints that will be used in phase III; it may not be an “ah ha” moment. The real moment of truth will be if Amgen decides to go forward into phase III. This could occur in 1H, 2015 and would trigger the first of some $650 million of milestones, half of which are payable on events reached prior to commercialization. This could lead to the payment of nearly $325 million of milestones over the period 2015 to 2018 period prior to approval (remember the current market capitalization is $350 million). Also CYTK is positioned to receive about half of the economics of omecamtiv when it is commercialized and can realize another $325 million of milestones based on sales levels achieved. Going into phase III should be a huge catalyst.

The next part of the meeting focused on the phase IIb trial of tirasemtiv. We went into great detail on the design of the trial and its statistical analysis. In addition, the Company just released in December some new and detailed information on patient outcomes for tirasemtiv in earlier trials. I read these as encouraging for tirasemtiv being successful in the BENEFIT-ALS trial. There is a very high probability that the phase IIb results will be released at the American Academy of Neurology Meeting in Philadelphia from April 26 to May 3.

So we have a double binary event year coming up for CYTK in 2014. I have high hopes for both trials, but these are novel new drugs in hard to treat diseases. There is a lot of risk. However, the promise of these two products is so great that if they formed the pipeline for a large pharma company like Merck they would be among the top products or perhaps the top two products in its pipeline and in my opinion would cause investors to view the pipeline as exciting. This is just how big there products are.

I continue to recommend the stock, but I just want you to understand that with the extraordinary upside potential there is also the possibility of the stock crashing to below $3.00 if both drugs fail in their trials.

Neuralstem (CUR)
I recently published an extensive note updating the clinical status of the various clinical trials of Neuralstem with its neural stem cell NSI-566 and I would refer you to that article. I listened to Richard Garr present at a conference and then went to the breakout session afterwards to eavesdrop on what other people were interested in. There were a number of investors and business development people from large companies who attended. There was a great deal of interest in the neural stem cell programs as I expected, but there was also great interest in the small molecule drug NSI-189.

We should see topline data from the phase Ia/Ib trial of NSI-189 in the next month. Ordinarily, phase Ia/Ib trials are primarily geared to determine efficacy and dosage and may not have much information on efficacy. However, this trial was done in patients who suffer from major depressive disorder (also known as recurrent depressive disorder, clinical depression, major depression, unipolar depression or unipolar disorder). So we might get a signal of efficacy from this trial. One thing that I am especially interested in regard to NSI-189 is that in animal models the drug increased the size of the hippocampal region in the brain by 20%. This was beleived to be the result of creating new synapses in the brain that may provide significant clinical benefit in brains damaged by disease or injury.

Neuralstem has been suggesting that it would partner NSI-189 if the phase I results warranted. With the increased amount of money that they have received from equity offerings, they may conduct the phase II trial by themselves. This would greatly increase the value of the program t0 shareholders and could provide a new leg to the story perhaps as important as the neural stem cell program in ALS, stroke and spinal cord injury.

I like the stock and continue to recommend it.

Cadence Pharmaceuticals (CADX)
I love the management of this Company. They have executed a launch of Ofirmev that can only be described as brilliant; it is one of the most successful launches of a new product by an emerging company in the last five years. Ofirmev reached about $101 million of sales in 2013 and management has guided to $$173 to $177 million in 2014; this was above the consensus estimate of $170 million.

Ofirmev currently has about 4% of the hospital injectable analgesic market and management has suggested that obtaining a 15% share is achievable which would lead to peak sales of $400+million. I think that the share can go significantly above 15% and Ofirmev could reach peak sales of $600 million. The 15% benchmark is the same level reached by an earlier non-opioid analgesic Toradol that is plagued by side effect issues-bleeding in particular. In comparison, Ofirmev is much safer and should enjoy much broader use.

The recent successful outcome in the patent litigation case against Ofirmev has had nearly the same impact on the stock as success in a key phase III trial. Ofirmev now has exclusivity through 2020 and could reach peak sales of $400 to $600 million in that time period. Please be aware that generic competition is likely to enter the market in 2020 so that the Company has to broaden its product offering significantly to absorb the eventual loss of exclusivity on Ofirmev.

There are other companies who have filed ANDAs against Ofirmev, but the history of such challenges after a successful patent defense is that they will try to reach a settlement with Cadence that will give them certainty on when they will be allowed to market their generic. There may be some noise on these remaining ANDA followers, but I think this patent challenge issue is behind us.

The key to success in the long term is using the highly effective hospital sales force as an inducement to bring in new products through licensing or acquisition. This can be a highly effective strategy comparable to that employed by Santarus and Jazz, two extremely successful companies. Cadence could also be a potential takeover target, but I think that management wants to do more than just cash out.

Repligen (RGEN)
As I have repeatedly said, this is one of the best business models I have ever seen. If I had to pick one stock to buy at this time and hold for the next ten years, this would be the Company although I think there is a good chance it could be acquired before then. I am, however, faced with a near term dilemma. Repligen held a patent that was key to the commercialization of Bristol-Myers Squibb’s Orencia; this patent expired on December 31, 2013. This was a major contributor to EPS in 2013 and its loss will cause reported EPS to drop from an estimated $0.52 in 2013 to $0.25 in 2014. EPS are projected to increase to $0.32 in 2014 and grow at 20% or more over the next five years.

The Company has a strong free cash position and biotechnology assets that add further value beyond the operating business. Adjusting for these, I can come up with a sum of the parts analysis that justifies the current valuation of around $12.00. The visibility and value of the biotechnology assets was illustrated by the just announced deal that licensed the HDAC inhibitor to Bio Marin (BMRN). This is an excellent partner that has the money and skill to develop the product. However, I am nervous in the short term that some traders will jump on what appears to be a high valuation combined with the 47% decrease in EPS that I am projecting for 2014 EPS and exert pressure on the stock.

I think that this is an exceptional company and will reward “buy and hold” investors handsomely over the next decade. Rather than telling other investors what they should do, let me tell you what I am doing. Based on life experience, I think that when you are invested in a company like Repligen which offers exceptional stability and growth potential, you don’t trade in and out. The risk is that you get out and never get back in.

I own this stock and you couldn’t pry this stock out of my portfolio with a crowbar. I just don’t sell fundamental situations like this. I just want to get through this temporary uncertainty and I would look at weakness in the stock as a buying opportunity. However, I am not adding to my position until I can determine how the market reacts to the 2014 EPS decline. I think that the company will issue formal EPS guidance for 2014 in the 4Q, 2013 conference call in February or March of 2014. This guidance will certainly make the 2014 EPS decline crystal clear to the market.

I met with CEO Walter Herlihy and focused on new product development and the potential for acquisitions. There were two things that I came away with. The first was that I think that there is the potential for a major acquisition in 2014. The Company only has revenues of about $70 million and I believe that based on public statements of management that there may be the opportunity to make acquisitions with sales in the range of $15 to $25 million. This could create an important upside surprise in earnings.

I think that it was initially difficult for investors to understand exactly what the strategy of the Company is. However, it is becoming clear that the Company has a goal to help biotechnology companies reshape their production strategies from building expensive limited purpose plants toward moving to flexible facilities relying on disposable products. In Mr. Herlihy’s vision, this will be the factory of the future and Repligen will be a primary supplier. Investors are not yet that appreciative of this huge opportunity.

Antares (ATRS)
I have been recommending Antares since my initiation report of December 15, 2011 and continue to do so. The basis for my recommendation was a new strategy formulated five years ago to change the company from a business model that was based on licensing its injection technology to corporate partners. The new strategy was to take proven drugs that are off patent and use Antares’ injection technology to improve the performance of the drug and to provide the intellectual property protection needed to block generic competition. These drugs will be marketed by Antares, not a partner.

Its products can be approved by the 505 (b) (2) pathways in which Antares only has to demonstrate bioequivalence to the generic drug. This strategy makes for a quick turnaround time on product development time. For example, it took 3 years between the IND filing and NDA approval of Otrexup. For a new chemical entity, this time could very well be 7 to 10 years. The FDA review time for Otrexup was 10 months. Antares believes that its next major product, QS T for testosterone replacement, can be launched in 2016. Thereafter, it believes that it can launch one major new product per year for the next five years. If so, this should provide explosive sales and earnings growth over the balance of this decade.

The Company is about to roll out its first commercial product, Otrexup for rheumatoid arthritis. Management has avoided giving any numerical guidance on sales potential in 2014 although in the past it initially said that peak sales potential could be in the $100 to $200 million range. With favorable results in a systemic bioavailability trial, management upped its guidance to the upper end of that range or roughly $200 million. I am anticipating the usual slow initial launch with sales as follows: 1Q, 2014 ($250 thousand), 2Q, 2014 ($1 million), 3Q, 2014 ($4 million) and 4Q, $6 million) resulting in full year sales of $11.3 million. I think that most Street analysts following the stock have comparable first year numbers. My 2015 sales estimate is $45 million.

The Company also has a lot of irons in the fire that arise from its original business model in which it licensed injectable drugs to other companies, most notably Teva. There is the potential for some positive developments here such as an AB rated formulation of Epipen and an AB rated formulation of sumatriptan. You can refer to my past reports if you want more detail.

The bears on the stock argue that the Otrexup launch will be slow and disappointing as has been the case with so many other recent product launches for small biotechnology companies. As noted above, I am modeling a slow launch and I think the Street is prepared for this. Bears also believe that Otrexup is nothing more than a new dosage form of methotrexate and this is a major mistake on their part. Methotrexate is the gold standard drug for rheumatoid arthritis but with oral dosage forms it is difficult to titrate the drug to blood levels above 15 mg/mm2. The advantage of Otrexup is that patients can be taken to higher blood levels and maintained on the trusted methotrexate before progressing to the more expensive biologic drugs like Humira and Enbrel. I think this drug will surprise investors on the upside.

Discovery Laboratories (DSCO)
DSCO has finally become a commercial company as it introduced Surfaxin in 4Q, 2013 with a team of 20 sales reps and 20 supporting commercial personnel. The Company has guided to sales of $7 to $9 million in 2014 with this being backend loaded toward the end of the year. Investors and analysts don’t properly appreciate the planning and detail that goes into a new product launch, especially by a new sales force. There are lots of things that can go wrong, but one of the few positives from the long term delay in gaining approval for Surfaxin is that DSCO has had an exceptionally long time to prepare. Investors will closely watch for indications of signs of progress in the launch, but in 1H, 2014, this will likely be in metrics other than sales, e.g. the number of hospitals that give Surfaxin a trial. We may see only a few hundreds of thousands of sales in 1Q, 2014 and a little more in 2Q, 2014.

The Company has dosed or should shortly dose its first patient in a phase IIa trial of Aerosurf. Ordinarily, a phase IIa trial is to determine the safety of a drug with efficacy measures being left to future trials. In the case of Aerosurf, we know that the drug is safe and effective because the drug being delivered is Surfaxin. This phase IIa trial is to determine if Aerosurf which is a combination of a device –the capillary aerosol generator that delivers Surfaxin and Surfaxin- is safe and can deliver therapeutically effective levels of Surfaxin to the lungs.

The way Surfaxin currently is administered is that the baby is held with its head down and the surfactant is drained through an endotracheal tube into the lungs. The baby is momentarily drowned in surfactant and subsequently placed on mechanical ventilation- a dangerous procedure. The hope with Aerosurf is that it can be administered via nasal continuous positive airway pressure through nasal clips. This product goal is to change the paradigm for treating respiratory distress syndrome in neonatology. The commercial opportunity is huge.

Back to the phase IIa trial and what we may learn. It may be or probably will be the case that Aerosurf is determined to be safe; this would allow the Company to proceed to the all-important phase IIb trial that could start in 2H, 2014 and produce topline results in 2H, 2015. The year 2014 could be a building year for the company and a quiet year for the stock. It is 2015 when we will be able to better determine the success of the Surfaxin launch and the potential for Aerosurf. There is some chance that stock performance in 2014 is muted by the lack of an “ah ha” moment.

Obviously, we are all keyed up about Aerosurf and for good reason. Success in the phase IIb trial would vault DSCO into the top ranks of emerging biotechnology companies and we could see a market capitalization in the billions instead of millions. However, I think that DSCO can be a successful investment even if Aerosurf fails. The sales force gives DSCO a unique footprint in the neonatology section of the hospital market in particular and perhaps the overall hospital market in general. The attractiveness of this sales platform may allow the Company to bring in significant new products through outright acquisition or licensing. There have been a lot of extremely successful bio-pharma investments that have been created with this strategy. The takeaway is that your downside in the event that Aerosurf fails could be an upside in the stock.

Other Companies on Which I Have Done Preliminary Research and I Am Interested In
I always am looking to expand my coverage to new companies. In San Francisco, I met with several companies on which I have done meaningful amount of research but have not yet completed my analysis. These are alphabetically: Corcept (CORT), Derma Sciences (DSCI), Geron (GERN), Neurocrine (NBIX), Rigel (RIGL), Sangamo (SGMO) and Titan (TTPI). I also visited with NovaBay (NBY), a Company that I previously recommended, but with which I am now on the sidelines.

Derma Sciences (DSCI)
This company is a little off the beaten track for me. It started as a company selling commodity wound dressings and this was its primary business until about six years ago. Though some very thoughtful acquisitions and internal development it has built a line of specialty, advanced wound care products that address diabetic foot ulcers and has built a proprietary sales force to sell these products directly to customers. This has involved some very significant investment spending.

This advanced wound care segment has now gotten to the size that it accounts for 42% of sales and is the key determinant of sales growth. The legacy commodity products could grow at 0% to 2% over time while advanced wound care has sales potential of 30% to 40%. Guidance for overall sales growth in 2014 is for sales of $92 million, up 15.5%.

The Company has also undertaken a high risk, high reward development effort for a novel new wound healing drug DSC-127 that should report phase III results in 2H, 2015. Heavy investment spending on building a sales infrastructure and doing phase III clinical trials has led to a significant burn rate and also may have confused investors on just what this company is all about. My preliminary view is that the Company is attractive on the basis of the wound care business and that success with DSC-127 would produce extraordinary upside. I think that failure with DSC-127 would produce an immediate sharp negative reaction in the stock, but DSCI would still be a good investment based on its wound healing business. The risk reward looks very favorable.

I have been doing research on this company for over five months and plan to publish on it in the near future. You may want to start your due diligence. As a word of caution on the near term, I think that the Company may have to raise capital in 2014. It told investors at the time of its last equity offering that it did not think it would need to raise capital again. Perhaps the announcement of an offering could cause some disappointment and a negative reaction that would be a buying opportunity.

Neurocrine (NBIX)
Neurocrine is focused on the development and delivery of novel drugs for endocrine and neurological disorders. Its lead drug is elagolix is a gonadotropin releasing hormone antagonist (GnRH) that is being developed for endometriosis. Neurocrine conducted six phase II trials for the treatment of dysmenorrheal, non-menstrual pelvic pain and dyspareunia in which clear efficacy was shown and a good safety profile was established.

Neurocrine announced a deal with AbbVie (formerly Abbott) in June of 2010 in which AbbVie (ABBV) obtained worldwide rights to elagolix. NBIX received a $75 million upfront milestone payment, the potential for $500 million of future milestones and a tiered double digit royalty if elagolix is approved. Results from the first pivotal phase III trial are expected in 3Q, 2014 and results from a second phase III are expected in 1H, 2015. The NDA could be filed in 2015 and approval is possible in 2016. This obviously assumes success in the phase III trials but based on the safety and efficacy seen in phase II trials, the probability for success is high. Peak US sales for elagolix could reach $500 million.

The company has just reported positive phase II results for a second drug; this is a VMAT2 inhibitor for the treatment of tardive dyskinesia. A phase III trial should start in 2H, 2014 and data could be available in 2015. I think that this will be followed by a second phase III trial with an NDA being filed in 2016 or 2017 and commercialization in 2017 or 2018 This drug is unlicensed and NBIX may choose to market the drug on its own, The peak US sales potential could be on the order of $300 million.

I just can’t say enough about the competency of management. Phase II trials are often exploratory in nature and they not infrequently miss their endpoints. However, this does not necessarily spell doom for the drugs. An astute management team can evaluate the trial and determine if there is a basis for going forward. The Company first did this with elagolix; an initial trial in endometriosis was unsuccessful in large part because the end points were flawed. Working with FDA, a more appropriate endpoint was agreed upon, a new and successful phase II trial was conducted and the product was licensed to Abbott, now AbbVie. It recently did the same thing with its VMAT-2 inhibitor. Results from an earlier phase II trial were disappointing, but the Company corrected the flaws in the trial and the subsequent phase II trial hit its primary endpoint.

The Company has an extremely strong financial position as I estimate that it ended the year with about $155 million of cash. The anticipated burn for 2014 is $30 to $40 million so that the Company is an extremely strong financial position. However, I would not be surprised to see an equity offering in 1H, 2014 to strengthen the balance sheet even more; this has been the past style of financial management. I think that this would not affect the stock negatively.

Geron (GERN)
This Company was thought of as a stem cell company under the prior CEO, Tom Okarma. The new CEO Chip Scarlett sold off the stem cell business and has focused on the development of the Company’s telomerase inhibitor imetelstat for oncology. I have known Dr. Scarlett for nearly ten years and have a great deal of respect for his leadership skills. I think my view is shared by many other investors and analysts.

Investors were recently excited by the results of a physician sponsored study in just 22 patients that showed that imetelstat shrunk the tumor in 23% of patients in a trial in myelofibrosis and demonstrated clinical improvement in another 18%. This was an electrifying result as only stem cell transplants have shown the ability to achieve clinical remissions; the new JAK 2 drugs like Jafaki, which is off to a strong commercial start, appears to just improve quality of life

I know that there were only a small number of patients studied in the investigator sponsored trial, but this produced a striking signal. It can be compared to that seen in early trials with Pharmacyclics Btk inhibitor ibrutinib in its small early trials; this drug was instrumental in PCYC achieving a market capitalization of $10 billion even before it was approved. I am not implying that Geron could reach this level if imetelstat is successful, but the market capitalization would certainly be better that the current $700 million.

Geron is now planning a phase II study that will identify parameters that are appropriate for a randomized phase III trial that could support full approval. With good results in phase II, I think that this drug could be approved for limited indications. The phase II study is expected to take about three years to conduct and the estimated cost would be about $20 to $25 million. Hence, meaningful data may be some time off.

Rigel (RIGL)
This company was an investment darling for Wall Street when it signed an incredibly lucrative deal to license its lead drug fostamatinib to Astra Zeneca in February 2010. This was an oral drug that was the most advanced of the spleen tyrosine kinase (SYK) inhibitors and had shown encouraging results in rheumatoid arthritis and other indications. Astra Zeneca licensed fostamatinib for extraordinary terms that included an upfront milestone payment of $100 million, additional pre-commercial milestones of $345 million, potential milestones related to sales levels of $800 million and tiered double digit royalties.

The announcement of the deal was obviously taken quite positively and the stock traded in a range of $7 to $11 for the next two years. However, the release of topline results on two phase III trials of fostamatinib in late 2012 and early 2013 suggested that fostamatinib was less effective than comparable agents, both commercially available and in late stage development. Astra Zeneca returned the product to Rigel in mid-2013. The stock subsequently traded to a low of $2.47 and the recent price is $3.40.

The mechanism of action of fostamatinib also makes it potentially important in the treatment of idiopathic thrombocytopenia purpura (ITP). A prior phase II trial involving 16 ITP patients produced some encouraging results. Astra Zeneca did not follow up on this signal and now Rigel intends to develop fostamatinib in ITP for its own account. The phase III trial will start in 1Q, 2014 and phase III results could be available in 2H, 2015. Market research performed by Rigel suggests that there is peak US sales potential of about $200 million and that this drug could be marketed by a sales force of 20 reps under Rigel’s control.

The Company is currently in the penalty box because of the disappointing RA results for fostamatinib and caution that the Company is going into a phase III trial in ITP on the basis of results for only 16 patients. Rigel should end the year with about $230 million of cash. It has been showing a quarterly burn rate of $15 to $17 million. It is cutting back on research spending which has driven the burn rate so that the intrinsic burn rate as a guess may be reduced to $12 million or so. The cost of the phase III trial in ITP could cost $25 million so that the cash position in 3Q, 2015 when topline results should be available could be $130 million. The Company is in an exceptionally strong cash position and should not need to raise capital in the next six to eight quarters.

Sangamo (SGMO)
This has to be considered as one of the companies with the best chances for success in the gene therapy field. I have followed this Company for nearly ten years and I think that management has done a remarkable job in building the Company. The extremely lead long lead times of paradigm changing technologies can often cause investors to become discouraged and abandon a company. As the Company has to return again and again to the capital markets to fund its development programs, this can lead to ever more onerous deal terms (with warrants) at ever decreasing price levels. This is how penny stocks are made. SGMO has avoided this through out-licensing of non-core technologies and through well timed equity offerings.

Sangamo has been building its technology base for nearly 15 years. It has a current cash position of about $135 million dollars and a prospective yearly burn of about $25 million as much of development costs on new drugs will be borne by its partners, Biogen and Shire. There are only 61 million shares outstanding and no warrants. Given that the Company only has one product in phase II development and that most of the products in its pipeline are pre-IND, it is remarkable see the strong cash position and limited number of shares. This attests to the astuteness of financial management and also to the promise of the Company’s gene therapy technology.

I am not alone in believing that the manipulation and alteration of the function of genes in humans, animals, plants and other living organisms is one of huge commercial opportunities in the 21st century. It has the potential to be societal changing, perhaps more so than the internet. In essence this is an effort to understand and control the underlying process of life. The possible applications in healthcare, food production and energy generation have the potential to change how societies function. The major question is when this occurs. The complexities are such that it may take decades to develop this technology sector.

Even though Sangamo is a small company, it is a leading player in the “gene game” through its pioneering research efforts on transcription factors. Its zinc finger protein transcription factors (ZFP TF) and zinc finger nucleases (ZFN) alter the functioning of genes. If successfully developed, they could represent a major leap forward allowing the treatment of diseases that can’t be targeted with existing drug technologies as well as improving on existing drugs. The technology also has broad applications in plant genetics, research assays and biological manufacturing. Sangamo has shown that its technology works in pre-clinical cell culture and animal models.

A lot of focus has been on SGMO’s efforts to alter genes in CD4 regulatory T-cells so that they will be resistant to HIV infections. Remember that HIV is a virus that attacks CD4 cells and lowers the body’s ability to fight infection. Sangamo has shown interesting data in a small number of patients. The Company also has relationships with Shire and Biogen that will result in a flurry of IND filings in 2015 and beyond. With the exception of the HIV product, all programs are in very early stage.

Through the partnerships with Shire and Biogen, Sangamo is poised to file numerous INDs in 2015 and beyond in many diseases that cannot be adequately treated with conventional drugs. These include hemophilia A and B, Huntington’s disease, β thalassemia and lysosomal storage diseases. Most of the funding of these trials will be funded by Shire and Biogen.

This is probably the most complex company that I follow because of its paradigm changing technology and broad product development effort. You may need a long time horizon to get involved with this stock. However, it is possible that if more proof of concept is established in clinical trials that are about to begin in 2015 and beyond that it could be an acquisition candidate. It has an exceptionally strong patent position.

Corcept (CORT)
This is a company that I have been calling on for nearly six years. Corcept launched its first product in 2012, Korlym, an orphan drug for the treatment of Cushing’s disease. The product is on track for sales of just under $10 million in 2013. My preliminary projections are for $17 million in 2014 and peak sales of perhaps $75 to $100 million in five years. Wall Street was disappointed with the initial launch, but sales of Korlym appear to have caught traction and if sales reach my $17 million projection in 2014, I think that investors could become more interested in the stock.

The key pipeline asset right now is the same drug that is used in Korlym- that is mifepristone. It is being studied in major depressive disorder. In that disease, mifepristone has failed two phase III trials. Retrospective analysis of these results pointed to a way forward and a new phase III trial is underway. Whereas Cushing’s disease affects 10,000 or so patients, major depressive disorder affects 2 to 3 million. Success in the major depressive disorder study would ignite the stock. Because the Company has established its own sales force, there is the potential to add products through licensing or outright acquisition.

The Company should end the year with about $55 million of cash. My preliminary burn rate projection is for $35 million in 2014 and $20 million in cash. Corcept probably does not have to raise cash in 2014, but opportunistically it might do so. I don’t think that there will be a financing overhang concern until late 2014 or 2015. This is an interesting situation and you may hear more from me on this Company in 2014. You may want to start your own due diligence on this Company.

Inovio (INO)
Over two decades ago, the creation of naked DNA vaccines gave the promise of a significant advance in the development of both therapeutic and preventative vaccines. The idea was to incorporate genes in a plasmid that would express certain antigens that would trigger an effective immune response that could be used to either treat or prevent cancer and infectious disease. A plasmid is a circular piece of DNA that when injected into muscle or skin will be taken up by cells and its genes will then express the desired antigens and trigger an immune response to those antigens. Vical (VICL) is well known for this technology. Unfortunately, its lead drug Allovectin-7 just failed in a phase III trial in melanoma. Still, it has two products approved for animal use, two products in phase III, two in phase II, one in phase I and two in pre-clinical.

Inovio has made two significant advances over the original naked DNA technology used by Vical. Its SynCon technology has allowed the company to better determine the most effective antigens to be expressed by the plasmids. As importantly, it has developed an electroporation process that allows much more effective uptake of injected plasmids into cells. These two advances may overcome issues that have been problems in the development of naked DNA vaccines. The generation of immune responses is believed to be the key predictor of effectiveness and Inovio’s technology has produced better immune responses not only when compared to naked DNA but also to other competitive technology approaches such as viral vectors, lipid vectors and the gene gun.

This year will be very transformative for Inovio. Its lead drug is VGX-3100, is a therapeutic vaccine for cervical dysplasia. The Company will report results from an extremely important phase II trial in 2H, 2014. This is a highly binary event that will have an enormous impact on the stock. I think the trial is well designed to give important information and the phase I and pre-clinical work provides a solid basis for conducting the trial. There is a reasonable basis for hoping for success, but this is a new technology approach in a disease state in which surgery is the only current therapy. I don’t have a recommendation on the stock, but this is a very interesting company.

NovaBay (NBY)
NovaBay has a novel anti-microbial agent, auriclosene that is being studied in three distinct disease states: urinary catheter blockage and encrustation (UCBE), impetigo and viral conjunctivitis. Each disease state involves auriclosene in a different concentration and dosage form. In UCBE, it is a liquid distillate; in impetigo, a gel; and in viral conjunctivitis an eyedrop.

The stock of NovaBay went on a roller coaster ride in 4Q, 2013 as the Company reported very promising phase II results for auriclosene in treating urinary catheter blockage and encrustation (UCBE); this caused the stock to climb from $1.38 on September 13 to $1.94 on September 20. Then on November 7, NBY reported that the phase IIb trial of auriclosene for treating impetigo failed to reach the end point of the trial. The stock plummeted from $1.69 to $0.91. The recent price of the stock was $1.24.

I think that the data in UCBE suggests that there is a high probability for success in this indication. However, the timeline for development is long; my estimate is that the product cannot reach the market until 2018. NBY has indicated that it believes that the failure in the impetigo trial was the result of a change in formulation and it may conduce another phase IIb trial with the old formulation. If so, results are probably not likely until 2015.

The overwhelming factor for the stock price in the near term is the phase IIb trial of auriclosene in a 450 patient trial in viral conjunctivitis that will report results in 1H, 2014. If successful, this would be a huge win for NovaBay and I think it could immediately lead to a tripling or quadrupling of the stock price and would be followed by a licensing deal that would provide the cash for moving auriclosene forward in both UCBE and impetigo.

NovaBay is a cash constrained company. I estimate that it ended 2013 with $14.5 million of cash. The recent burn rate of the Company has been about $2.5 to $3.5 million per quarter so that the cash position supports 4 to 6 quarters of cash burn at that rate. However, the start of phase II/III trial for UCBE in 1H, 2014 and possibly a phase IIb trial in impetigo could meaningfully increase the burn rate. I think that the Company will need to raise significant amounts of capital in 2014. NovaBay really needs to win the viral conjunctivitis trial or it faces serious problems in financing the Company going forward. Failure in viral conjunctivitis could cause the stock to plunge meaningfully below $1.00 making future equity offerings difficult and highly dilutive.

So what are the chances for success in the viral conjunctivitis trial? A previous phase IIb trial that was performed by Alcon (the then licensor) failed and it returned the drug to NovaBay. Management looked closely at the trial and identified problems in trial design and also found signals of efficacy that encouraged NBY to conduct a phase IIb trial on its own. This makes the outcome of this trial problematical to assess. I am also worried that the dosing regimen requires eight drops per day for ten days and this might cause compliance to be a problem in the trial.

My investment position on NovaBay is that I do not want to own the stock prior to the disclosure of the results in phase IIb viral conjunctivitis. While I think that success in trial could lead to a $2.50 to $5.00 stock price versus perhaps $0.60 to $0.80 if it fails, I am just too concerned that the trial outcome could be negative.

Titan (TTPI)
Titan is developing Probuphine, which an implant that delivers a sustained release dosage form (an implant) of buprenorphine. This is the active ingredient in Suboxone which is used for treating opioid addiction; it is a $1.2 billion drug that is coming off patent. The hope is that more consistent and sustained release from an implant will assure compliance and perhaps be more effective than Suboxone. Things looked great in early 2013 as the FDA designated Probuphine for accelerated review and scheduled an advisory committee meeting prior to the March, 2013 PDUFA date. Many investors considered this as a slam dunk for approval, but when it comes to the FDA there is no such thing.

The head reviewer unexpectedly was concerned with pharmacokinetics of the drug and even though the advisory committee recommended approval, the FDA issued a complete response letter that rocked the stock. The FDA has demanded another phase III trial and the Company has been meeting with the FDA to determine what the design of the trial should be. This delay and uncertainty has put the stock in limbo and the price has declined from $2.00 just before the advisory committee meeting to the recent price of $0.67.

I am interested in the stock because no one is paying attention to it and I think that Probuphine is an approvable product and that it will have substantial value. The licensor of Probuphine is a private company called Braeburn that has the financial resources and motivation to acquire Titan. Titan will have to determine the phase III trial design and then undertake the trial; results will not likely be available until late 2015. I will do more work on the Company but I don’t see much potential for a move in the stock in the near term.

Companies That I Am Just Taking a Look At
As I previously mentioned, I am always on the prowl for new companies and I like to meet with companies with which I have had little prior experience. In San Francisco I met with three such companies: Chimerix, Tonix and NeoStem.

This was my first meeting with management and my first exposure to the Company. I liked management and plan to do more work on the Company. Tonix is developing an older drug cyclobenzaprine for a new indication. It was initially introduced by Merck in the 1980s (as Flexeril) for the relief of back muscle spasms and associated pain. It has also been studied but not approved for the treatment of fibromyalgia whose major presenting symptom is pain. As a generic drug, there are more than 1.2 billion prescriptions written each year for muscle spasticity

Tonix is developing the drug for fibromyalgia as a sub-lingual tablet that is optimized for chronic use and is taken at bedtime. This is estimated to be a $1.5 billion market in the US. The Company believes that phase II trials have signaled that its drug, TNX-102 SL, provides superior pain relief than the current leading products: Pfizer’s Lyrica ($475 million of sales), Eli Lilly’s Cymbalta ($600 million) and Forest Laboratories Savella ($100 million).

Tonix is conducting a phase IIb/III trial called BESTFIT that is enrolling up to 200 patients with half on TNX-102 SL and half on placebo. Topline results are anticipated in 2H, 2014. I haven’t had much luck with companies developing repurposed molecules-specifically Transcept’s (TSPT) Intermezzo and Somaxon’s Silenor. These were great products, but didn’t fare well in the commercial market due to barriers set up by managed care. However, I have an open mind and will do more work in 2014.

Chimerix (CMRX)
The therapeutic goal of Chimerix is to improve the cellular uptake of antiviral drugs and reduce the amount of drug circulating in the bloodstream. It does this with its proprietary Antiviral Lipid Conjugate Technology (AVLCT). This has the effect of increasing the efficacy of the drug while reducing side effects.

The company has two compounds in clinical development. CMX001 or brincidofovir is an AVLCT-modified version of the antiviral drug cidofovir. It is active against all five double stranded DNA viruses known to cause disease-herpes, adenovirus, polyoma, papilloma and pox. Its second drug is CMX157 an AVLCT modified version of tenofovir, which is the backbone of Gilead’s (GILD) $7 billion Viread franchise. CMX157 has been out-licensed to Merck.

Brincidofovir is in a Phase III trial called SUPPRESS that has the goal of preventing opportunistic infections caused by cytomegalovirus in transplant patients. Secondary endpoints are designed to position the drug as broad spectrum therapy for other dsDNA viruses as described above. Topline data is expected in mid-2015 and success in this trial could lead to a huge commercial opportunity.

The Company is well funded as a result of an IPO in April 2013 that raised $117 million. It ended 3Q, 2013 with $116 million of cash and through the first three quarters of 2013 has had a burn rate of $9 million per quarter. At that burn rate, it has cash to last until mid-2016, approximately nine months past the release of the SUPPRESS results.

The CEO of the Company is Ken Mock. He is a highly experienced and capable executive that I have known for nearly 20 years. The management team is solid.

NeoStem (NBS)
NeoStem is developing products based on living cell therapies that derived from autologous bone marrow stem cells. The Company also acquired Progenitor Cell Therapy, a contract development and manufacturer of living cells. It offers a fully integrated manufacturing solution for companies that are developing living cell therapies. This manufacturing expertise is a huge competitive advantage for NBS.

Its lead therapeutic product is AMR-001, a living cell therapy that infuses CD34+CXCR4+ T-cells which target heart tissue. The therapeutic goal in the current clinical trial is to preserve heart function after percutaneous intervention, a surgical procedure that compresses plaque and widens arteries so that blood can flow more easily. This product would also be applicable in treating heart attack victims.

AMR-001 is in a phase II trial in ST Segment Elevation Myocardial Infarction, or STEMI. The goal is to prevent damage to heart muscle following the percutaneous intervention. This is a 160 patient randomized trial that is double blinded. The endpoint will be judge on improvements in heart muscle function as assessed by SPECT imaging. Topline results could be available in 4Q, 2014.

My interest in NBS follows from my work in living cell therapies that are used by other companies that I have written on-Athersys (ATHX), Northwest Biotherapeutics and ImmunoCellular. As I previously wrote, I believe that living cell therapies based on stem cells could be a paradigm changing technology. I will do more work on NBS. I have a very limited understanding of its technologies at this time.

Advaxis (ADVX)
I met with the new management of Advaxis for the first time with the intention of getting to know them. Dan O’Connor is the new CEO and spent time at ImClone before it was sold to Eli Lilly. Greg Mayes is the new COO. He most recently was head of human resources at Denderon and worked with Mr. O’Connor at ImClone. Advaxis has been very slow in advancing its technology and has been forced into doing a string of financings at depressed stock prices causing significant increases in share count. This is a turnaround effort and new management is very aware that they have to gain the respect of a skeptical Wall Street.

Advaxis has an immunotherapy approach that uses live attenuated bacteria to deliver proteins that simulate cancer antigens that can activate the immune system. Immunotherapy is a very active area of research at this time. The Advaxis approach is a little off the beaten development track. The Company’s lead product ADXS-HPV, is being evaluated in phase I and phase II clinical trials for HPV-associated diseases including invasive cervical cancer, HPV-associated head and neck cancer, and anal cancer.

I have little understanding of the technology of Advaxis and obviously no opinion on the stock. However, I do have an interest in immunotherapy and turnaround situations can be intriguing and rewarding. I plan to schedule a visit in the next few months.

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  1. Wesley Becker says:

    May 30, 2014. There has been some price action on both Nova Bay (NBY) and Discovery Labs (DSCO) over the last couple weeks. I saw the new report on DSCO yesterday. Do you have any new thoughts or plans to follow up on NBY? Thanks.


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