[Editor's Note, March 4, 2013: Author has revised portions of this article.]
Looking at the balance sheets of development stage biotechs can be a confusing business. Just looking at hard numbers as they are published on financial statements won’t tell you much unless you know where the numbers are coming from, what stage in clinical trials the company is at, and the chances of clinical trial success.
What tends to happen in these cases is that as a company progresses towards approval, it invariably goes deeper and deeper into debt as the clinical trial process becomes exponentially more expensive. Phase I trials are one thing and only involve a handful (usually 20-80) of patients to test safety. Phase II is more expensive and time consuming, but as a company goes head on into phase III, that’s when costs really start to ratchet up seriously. According to research done by Forbes, phase III accounts for an amazing 90% of all costs for drugs that eventually do get approved, so this isn’t just an arithmetic increase. We’re talking orders of magnitude here.
Consider the following case of Immunocellular Therapeutics (IMUC) and Northwest Biotherapeutics (NWBO). Both are developing immunotherapy vaccines for brain cancer. Respective balance sheets are here and here. At first glance, IMUC looks pretty healthy, and NWBO quite precarious. IMUC has over $10M in cash, no long term or short term debt to speak of, and an accumulated deficit of only $43M. To make it look even better for IMUC, not shown on the balance sheet is that IMUC has also raised an additional $19.3M in an equity financing last October, bringing its total cash near $30M. On the other hand, NWBO shows very little cash, current debt of over $20M, and an accumulated deficit of close to $300M. But this is misleading for several reasons.
First of all, much like IMUC, NWBO’s latest balance sheet does not show recent financing. Back in December, the company raised close to $14M in a public offering which will be recorded in the company’s next 10Q, and will significantly pay down its current debt. But more importantly, it is crucial to understand exactly where NWBO stands right now versus IMUC. To get a good picture, take a quick glance at the two companies’ cash flows. IMUC has spent an average $4.8M annually since 2009 with costs ratcheting significantly as the company continues with its phase II trial. NWBO has spent three times that average every quarter just in the last four quarters. This is an order of magnitude higher and the reason is simple: Phase III is inordinately expensive and drawn out.NWBO's phase III study for its pipeline product DCVax-L was first received by Clinicaltrials.gov way back in 2002. To put that into perspective, that is two years before Immunocellular even existed. This trial, which first began enrolling patients in 2006, is estimated to have its final data collection this year in June according to the company’s filings at Clinicaltrials.gov, an exhausting and expensive seven years after the first patient enrolled.
As for IMUC, it has not even begun any phase III trial. If anyone thinks the company can avoid the same long drawn out process and hemorrhaging cash flows that NWBO has endured for the past 7 years and keep its balance sheet as rosy as it is now, he is sorely mistaken.
Instead of comparing NWBO to IMUC, two companies that are in totally different ball parks as one is on the cusp of finishing phase III and the other hasn't even started, NWBO should be compared to a company like Dendreon (DNDN) and its phase III expenses for Provenge, its flagship prostate cancer immunotherapy drug. Provenge received FDA approval in April 2010. In the years leading up to final approval as the final phase III was ongoing, Dendron's expenses were staggering. Particularly in the year before approval in 2009, net loss was $220M, compared with $72M in 2008. $220M is 76% percent of NWBO's entire 17-year accumulated deficit, just to put these numbers into a little more perspective.
The pattern is familiar. The closer a development stage biotech gets to approval, the faster it hemorrhages cash. Taken from this perspective, the question almost reverses itself. Negative cash flows have averaged just over $29M annually for NWBO since 2009. This year it looks like the loss may reach around $40M, and considering that the DCVax-L phase III trial is nearing a final 7-year completion, this is a tiny fraction of Dendreon's expenses during Provenge phase III.
So how is it that NWBO has spent so little over 17 years in operation? I think it is thanks to extremely tight management which has been necessitated by the stock's OTC second-class status (recently uplisted to Nasdaq however), the fact that it has had trouble raising money and has typically financed itself quarter to quarter just to survive over the last several years. When a company is one quarter away from bankruptcy all the time, that tends to inspire management to be ultra efficient or face the music. Perhaps NWBO's failure to get institutional investors to flush it with cash has been a blessing in disguise as expenses have been cut to the bone.
For IMUC, at current cash burn rate of $16.5M over the last 4 quarters, its nearly $30M in cash will last about two years, assuming the current rate does not increase. Nevertheless, it will be many more years before any product breaks through the pipeline, as phase III has not even begun and cash burn is still relatively light. As for what will happen to NWBO’s stock and whether the company will need another dilutive financing to pull through the final stages of DCVax-L’s phase III, my thought is, if DCVax-L fails, the company will be out of options. But if DCVax-L succeeds, opening the door for its other dendritic cell pipeline products like DCVax-Prostate and DCVax-Direct for all cancers (both in phase II), the question of whether NWBO goes through one more equity financing on the way to that success is rather moot.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.