Can Celsion Survive After Imploding Over Phase III Results?

Jan.31.13 | About: Celsion Corporation (CLSN)

Celsion (NASDAQ:CLSN) shares plunged furiously in premarket trading this morning, at one point down over 80%, as they announced what appeared to be an absolutely catastrophic failure from their Phase III heat trial for ThermoDox, which was described on their site as "an investigational, proprietary heat-activated formulation of liposomal doxorubicin, an approved and frequently used oncology drug for the treatment of a wide range of cancers, and is currently being investigated in clinical trials for its potential to treat patients with intermediate (tumor size 3 to 7 cm), unresectable (inoperable) HCC."

Celsion had been on a monster run for the past six months, with every indication thus far being that they were expecting great Phase III results. On the heels of Keryx (NASDAQ:KERX) releasing their successful Phase III results a couple of days ago (and the ensuing 100% stock price appreciation), Celsion shareholders were hoping to follow suit this morning and reap the benefits of the ensuing stock price movement. The chart here shows the six month run-up, followed by the eventual mess that occurred early this morning.

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Celsion had released a press release this morning before its planned conference call indicating that "Celsion has determined, after conferring with its independent Data Monitoring Committee (DMC) that the HEAT Study did not meet the goal of demonstrating persuasive evidence of clinical effectiveness that could form the basis for regulatory approval in the population chosen for study. The HEAT Study was designed to show a 33% improvement in PFS with 80% power and a p-value = 0.05."

Following this press release, CEO Michael Tardugno, sounding demoralized and melancholy, took to a conference call with his right hand man, VP of Corporate Strategy and Investor Relations Jeff Church. Investors like myself, eager to get more information on how close ThermoDox came to performing well, tuned in.

What we got was nothing short of an absolute funeral. The tone of the call was meek and reserved at best, with analysts offering apologies to Celsion executives over the results, with one analyst even offering his "condolences." We also heard from a remorseful and humbled-sounding CEO, who, to his credit, manned up and took the helm of his company's ship on the conference call in the midst of the bad news. Credit is due there.

The press release offered this morning was quick to note that Celsion's balance sheet was seemingly in good enough shape to weather this disaster, stating "The Company projects its unaudited cash and investment balance to be approximately $23 million as of December 31, 2012 and approximately $27 million as of January 31, 2013." Tardugno noted on his call this morning that Celsion has "enough cash on hand to make it well into 2014." After all, the company had just received a non-refundable $5 million from their recently disclosed partner in China, Hisun Pharmaceuticals.

After this partnership was disclosed, I penned this article, trying to figure out the scenario in which the partnership was solidified. I offered up the following potential scenarios:

Was this agreement signed and $5 million put up with or without being privy to the results of the Phase III data? There's absolutely no way to know, so we're left speculating about several scenarios:

1. Zhejiang could have signed an NDA with Celsion, which is currently holding and aware of the results, and made the easiest decision in history on great results by putting money upfront and agreeing to potentially hundreds of millions more. Large investors like Zhejiang could be privy to the information before the public if they signed an NDA in conjunction with the financing.

2. Zhejiang has not seen the Phase III results, but Celsion has, and they've passed along some sentiment on them. Perhaps they're not amazing and still need to be developed? This is, again, a technology development agreement. This could be good news put out before the mediocre or poor news that ThermoDox, although showing promise, still needs further development. This is one situation that gives me a slight bit of pause when considering the news today.

3. Neither group has seen the results yet, and this agreement is based 100% off of past metrics. Future execution of this agreement could still be predicated on the results of Phase III, which no one might have. Zhejiang and Celsion could be joined arm and arm with the common shareholders, still blinded, and waiting on what is ultimately going to be the biggest news in the company's history.

We now know that Hisun more than likely did not have the results when they entered into this agreement. CEO Michael Tardugno, when pegged with questions about their partnership with Hisun, answered unconfidently, offering up no details as to the potential future with Hisun. This investor was under the impression from this morning's conference call that the Hisun partnership may have just imploded as quickly as the stock price.

The call this morning pointed out that the HEAT study protocol had never been compromised and that the study was executed precisely. It was noted that the results were as pure as they could have hoped for from a blind study, thereby cancelling out the possibility that the poor data had anything to do with any factors other than it just not being effective.

The call didn't offer up any specific details of how poorly the trial did, but at one point, after being prodded, the CEO noted that the results "were not close" to being near what they were hoping for. A grim statement, for sure.

So, this offers up the question of what's next for Celsion as a whole. With the stock opening trading near $1.50, off about 75% from yesterday's closing point, investors are wondering if this is time to reload or simply cut losses as a whole and move on. Here's a best and worst case scenario, as I see it, for Celsion moving forward.

Bullish Case: Investors note that the control group survival was 20% better than projected. The CEO alluded to the fact that the drug was released properly, seemingly indicating some positives for the company's methods. The CEO also noted that there was no chance to compare subgroup data, so it is possible that ThermoDox worked on a certain subset of individuals and can be continued to be developed for that subset. For example, if it worked great in China, the Hisun deal would still have a chance of flourishing - after all, it is a "Technology DEVELOPMENT Agreement." The company has enough cash on hand to make it through 2014, according to the CEO this morning. He also noted that they have had substantial success with ThermoDox in their breast cancer preliminaries; but again, that's what they alluded to with this trial as well.

Bearish Case: From an objective standpoint, there really seemed to be nothing presented this morning in the conference call that alluded to anything in the form of confidence going forward. The bearish case here is that the platform on which the entire company's technology is based, the liposomal delivery of drugs, cannot be made effective. Barring a strategy change for the company, if this is found to be the case, Celsion could potentially be a 100% loss. If Celsion's breast cancer trials are failures and the company cannot shift strategy, insolvency becomes the next step.

Having said that, I'm wishing the best to everyone involved, long or short here. I look forward to following Celsion's developments in the future and writing about them for interested investors. It would be an amazing story to see this company turn around and beat the odds pinned against them here from these poor results. Companies have done it before and they will do it again.

My hats off to the CLSN team for their hard work and dedication to solving this problem that has no doubt affected us all in one way or another. I wish them, and all investors, good luck moving forward.

Disclosure: I am long CLSN. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I own both CLSN calls and puts.