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Expert Financial Analysis and Reporting

SmithOnStocks Mailbox February 25, 2014

I have found that there are some very smart people out there who have interesting questions and perspectives concerning my articles. I periodically share with subscribers questions asked of me and my response. Also, some subscribers have a different perspective or additional insights beyond mine that I find informative. Sharing this information is the purpose of SmithOnStocks Mailbox. I encourage all subscribers to participate.

Cytokinetics (CYTK, $9.65)

Question: I think I read that you think Cytokinetics could be a $20 stock if the results are spectacular in BENEFIT-ALS and they file for approval without a Phase 3 trial. Or do you think the company could be worth that much if the primary endpoint is reached and they still move on to a Phase 3 trial?

Answer: Actually, an outright success in the phase 3 trial that would encourage the Company to file for regulatory approval might drive the stock much higher than $20, perhaps to $40 or more. In order to file on the basis of one phase 2b trial there would have to be a strong p value of perhaps 0.02 or less for the primary endpoint of ALSFRS-r. In addition key secondary endpoints related to respiration such MVV, SCV and SNIP would all have to be moving in the right direction.

Outright failure of the trial and a decision by CYTK to abandon the drug would probably drop the stock to $4. Then, the market would begin to focus on the potential for Amgen (AMGN) to move omecamtiv mecarbil in congestive heart failure into phase 3 and would be comfortable with the strong cash position of the Company; it should have a cash balance of $72 million at year end 2014. I could see the stock climbing back to $6 to $8 by the 3Q or 4Q, 2014. A decision in 1H, 2015 by Amgen to move that drug into phase 3 could then move the stock to $12 to $15 or possibly much higher.

I think that we are seeing a clear biologic effect of tirasemtiv in the blinded BENEFIT-ALS data and the two phase 2 trials-CY4024 and CY4025. For that reason, I think that BENEFIT-ALS is unlikely to be an outright failure, but the data may not be strong enough to support registration based only on BENEFIT-ALS.

If the data is pretty strong, maybe p=0.04 to 0.05 with support from the secondary endpoints, but the Company needs to do a phase 3, the stock could trade up to $10 to $15.

If the trial doesn’t hit a p of 0.05 , maybe p=0.06 or slightly higher and the secondary endpoints are positive, but the Company decides to move into phase 3, I think the stock might drop to $7 and then move higher in 3Q or 4Q, 2014 as focus turns to omecamtiv mecarbil.

All of these estimates give the impression of precision which is not actually the case. I use these numbers to indicate my intuitive feel for the magnitude and trend of the stock price in each of these scenarios. And of course, there are many other in-between scenarios.

Agenus (AGEN, $4.21)

Question: In regard to your recent article on Agenus in which you called the acquisition of 4-Antibody transformational, aren’t they awfully early in clinical development for checkpoint inhibitors and other T cell regulatory products to assign much stock value. They haven’t even filed an IND.

Answer: I think that it would take many years (possibly decades) and hundreds of millions of dollars (or billions) for Agenus to develop its T cell regulatory products and cancer vaccine technology alone and in combination.

My investment thinking is based on the belief that the combination of T cell regulatory and cancer vaccines promises to be a major leap forward in the development of cancer drugs. Agenus may be the first company with in-depth knowledge and expertise in both technologies. The probable end game for Agenus is to be acquired by a large pharma or biotech company that wants to get in the game.

There is some parallel with Sangamo (SGMO, $20.25) which has a dominant leadership position in the development of zinc finger technology and whose products are mostly pre-IND. The market recognizes the value of this unique platform and has assigned a market value of $1.2 billion to Sangamo. At the current price of $4.21, the market value of Agenus is $270 million.

Neuralstem (CUR, $3.62) and Cytokinetics (CYTK, $9.65)

Question: If Neuralstem is successful in its stem cell treatment for ALS, what impact would that have on the prospects for tirasemtiv for ALS produced by Cytokinetics?

Answer: They work by different mechanisms of action that are synergistic. The Neuralstem stem cells are believed to maintain or improve neuronal functioning.  ALS is caused by a deterioration or death of nerve cells that control muscle function. So CUR's neuronal stem cells after implantation will hopefully maintain the existing neuronal capability. It may be too much to hope that they improve neuronal activity although it can be argued that this is the case with Ted Harada.

Tirasemtiv improves the muscle response to a neuronal impulse and has no activity on the underlying cause of ALS, i.e.-neuronal death. These treatments could and almost certainly would be used together. A factor to think about is that the neural stem cells are implanted through a complex surgical procedure requiring hospitalization. Tirasemtiv is just a pill. This might have an effect on the decision of the patient about which to use and might work in favor of tirasemtiv. However, my guess is that if both treatments are effective, patients will want both. Let us hope that both are effective.

Cytokinetics (CYTK, $9.65)

Question: Shouldn’t we be nervous about Cytokinetics raising money before the results of BENEFIT-ALS are known? Why not wait until after the data and raise money then.

Answer: This was an insurance move on the part of the Company in the event that the data is promising, but not conclusive and they need to move forward with a phase 3 trial. The Company obviously has no knowledge of the results.

I think that the most important take away from the recent equity offering is that sophisticated institutional investors want to invest ahead of the release of data from BENEFIT-ALS which we should see in late April or late May.

Derma Sciences (DSCI, $15.20)

Question: In my due diligence in regard to Derma Science’s (DSCI, $15.20) Medihoney, I saw this report. A 2008 Cochrane Review found that honey may help improve superficial burns compared to standard dressing, but there was insufficient evidence from studies, many of which were on manuka honey, to be conclusive, and the use of honey for leg ulcers provided no benefit. The review found that there was insufficient evidence for any benefit in other types of chronic wounds.

Answer: The Cochrane review reached the same conclusion for all major advanced wound care dressings and technologies including silver antimicrobials, negative pressure, and hyperbaric oxygen which are currently the foundations for standard of care. These products account for about $3 billion in sales.

The issue here is that almost all of these products are approved on the basis of a 510 (k) regulatory approval process that does not require large scale clinical trials. Essentially, product approval only depends on showing equivalence to an existing product.

As a result, there is very little clinical trial data and certainly not the type of data that comes from phase 3 trials. Success in the commercial arena is based on clinical experience one center at a time. The center has to try the product first on one patient and if it works they then try it on others. They can’t rely on data from a clinical trial; they must rely on hands on experience. I think that the sustained 30% to 40% growth rate of Medihoney sales is an indication that physicians and nurses believe they are getting good results.

Derma Sciences (DSCI, $15.20)

Question: The same subscriber went on to write that  in the wake of the high premium paid for manuka honey, much of product now labeled as such worldwide is counterfeit or adulterated.

Answer: The counterfeiting is a huge problem, but only in retail and only with small providers. Derma’s partner is Comvita, the largest producer of manuka honey in the world. They are pushing for more testing to get rid of this issue at the retail level. For Derma Science’s products, the honey must be at a specified level (Manuka rating) with the FDA and all other regulatory bodies around the globe. They can't fake it.

Northwest Biotherapeutics (NWBO, $6.93)

Question: In regard to Northwest Biotherapeutics (NWBO, $6.93), I read the article you referenced as: Neuro Oncol magazine dated April 12, 2010 titled “Intratumoral dendritic cells increase efficacy of peripheral vaccination by modulation of glioma microenvironment”

The Kaplan Meier curves for the murine models appear to be direct analogues of various applications of DCVax-L and DCVax-Direct. They have really helped me understand what Ms. Powers is seeing and doing in the lab.

Answer: This reference was provided in response to one of my articles and did not come from me. I am glad that you found it of value. One of the things that I am striving for is to make my website a community of ideas. I work hard and try to understand everything I can about the companies that I write about but I am only one person and I am not the Delphi oracle. There are many bright people out there that I hope will contribute their thoughts for the benefit of all. In regard to DCVax Direct, I have been low keying it, but this could be a very interesting new drug. They have treated a number of patients and I think that they are seeing some interesting results, but this is all anecdotal information.

Northwest Biotherapeutics (NWBO, $6.93); Argus Therapeutics (ARGS, $8.65)

Question: Isn’t Argos Therapeutics essentially the same approach as Northwest Bio?  They use RNA for the antigens, but that doesn’t seem meaningfully different and the Company clearly has backers with far stronger credentials.  They also have much better journal publications and a $39MM NIH grant so why isn’t this company best in class?

Answer: I just took a quick look at Argos, which recently came public at $8.00 per share. Like NWBO, it is extracting monocytes from the body and maturing them into dendritic cells. Like NWBO, it extracts tumor tissue. NWBO exposes the dendritic cells to tumor tissue to get them to express tumor antigens. The difference between the two companies is that Argos says that it uses tumor RNA to load the dendritic cells and trigger an immune response. There is no way to judge which is better.

Argos says that it is in a pivotal trial for kidney cancer. I don’t know what its next target might be. Of course, NWBO is in a phase III trial for glioblastoma and has done studies in prostate cancer and ovarian cancer with DCVax-L. DCVax Direct uses naked dendritic cells that are injected directly into inoperable tumors. These are all different disease targets.

The base technology of both companies use dendritic cells as discussed above. The therapeutic targets are very different. I don’t see the companies as direct competitors. For the sake of argument, let’s say that Argos has decided to go after the glioblastoma opportunity. I assume they would in the pre-clinical stage since they don’t list any clinical trials in glioblastoma. They would have to file an IND, go through the phase I, II, III clinical trials and then file an NDA. This would be a six to eight year process. DCVax-L will or will not be commercialized based on phase III results due in 1H, 2015. NWBO, if successful in phase III, would be four to six years into commercialization before Argos could launch this hypothetical glioblastoma product. This is not an investment concern. The argument for NWBO going after the kidney cancer opportunity is the same argument in reverse.

I think that more activity in the dendritic cell cancer vaccines and viral vaccines (Argos has an HIV drug in development) can be expected and this is encouraging as it validates the approach. There can be several successful players if the approach is viable. So don’t worry about Argos affecting the prospects for NWBO

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