Coronado Biosciences (CNDO) has been a controversial stock of late, with shares up 83% YTD, but since hitting a high of $12 in late April, are now trading at $8.25, yielding a market cap of $230mm. Recent pieces on Seeking Alpha have outlined various tenets of the Short Thesis on the shares. In this article, I will lay out my view, that the short bear raid is overdone, and that many of the aspects of the Short Thesis are in fact based more on perception than reality.
Given the controversy around the stock, there is a range of opinion on the true debates, but my understanding is that the Short thesis is predicated upon three central points:
1) Management's track record of execution/ pedigree is lacking
2) The technology is not validated and will not achieve market uptake
3) The trials are not powered properly/ the data is not interesting/ differentiated
All of these roll into an "overvalued, overhyped" stock in the Bear view.
Let us analyze each of the claims in turn (in no particular order, as I am frankly not sure which of the three is driving the bulk of the Short view)
Short Thesis #1: Technology is not Validated/ Unproven
At first blush, the idea of treatment with a microscopic nonpathogenic egg of a pig whipworm for the treatment of autoimmune diseases (CNDO-201- going for indication in Crohn's, Ulcerative Colitis, and MS) is not the most 'conventional' pathway, nor may patients or clinicians intuitively react positively to the "sound of it." I am focusing primarily on the debate on the '201 as that is the most visible and the furthest compound ahead in development.
A deeper examination of the pathway is in fact quite intriguing. Specifically, epidemiologic studies have shown that '201 has natural immunomodulatory effects, and that it can regulate abnormal immune function and alleviate inflammation in diseases that it is indicated for. As the hypothesis goes, innate mechanisms of helminths (worms) promote activity of T-cells, dendritic cells, and macrophages while down-regulating the activity of effector T-cells which can cause detrimental immune responses. Mechanistically, '201 alters the cytokine profile of the gut mucosa to down-regulate pro-inflammatory and up-regulate inflammatory molecules... which allows the compound to alter multiple validated and currently drugged targets, including TNF-alpha.
Short Thesis #2: The Clinical Data Is Not Compelling...
The Phase II data that showed a 79% response rate and 72% remission rate in Crohn's patients, and significant response rates in UC patients, as well as 68% response benefit and 61% remission rate is actually better than the data shown by Remicade (61% and 41% respectively)... which has sales in the Billions. Simply put, a novel, safe, and reversible treatment that has shown tolerability in randomized placebo-controlled trials could change the current treatment paradigm, and the phase II data, at first blush, appears to still hold that possibility.
Short Thesis #3: Management's Background Is Not Impressive/ Is Suspect
A significant discussion on this site, and in other forums, has centered on management's background and track record of execution. In my view, investors should focus on the actual Operators of the company as their primary determinant of understanding the likelihood of success, as opposed to any major shareholders or financial backers, as those Investors' backgrounds, motivations, and pedigrees are of lesser importance in determining actual company results.
CNDO's current management team comes from a very strong background with highly relevant experiences to CNDO's chief indications. CEO Weisman was company group Chairman of R&D for Pharma at JNJ, and developed Remicade... combined with George Avgerinos, who ran the Humira franchise at AbbVie, and you have a deep bench with expertise in this disease.
Implications for the Stock
With a market cap of $230mm without a commercial drug, clearly the market is already discounting a decent sized revenue stream at launch. While there have been some concerns regarding share dilution as it relates to the Shelf filings, I believe these concerns are overstated as many Biotech companies seek financing ahead of Ph-III and it is somewhat of a hedge against the trial results as has been mentioned in prior articles.
Leaving aside the optics surrounding share filings, it is my view that CNDO's revenue stream has been undervalued simply based on the transformative potential within the treatment paradigm, and the sheer size of the untapped markets. Recall that Humira is currently the top selling drug in the WORLD (ahead of Lipitor)... grossing $10b per year, and that the initial data from CNDO appears that it may seek to capture a fair swath of this market opportunity.
From an epidemiology perspective, I view the total market at 1.5mm patients in Crohn's/Ulcerative Colitis, with upside in MS (2m), Psoriasis (7.5m), and AML (25k). With pricing estimated at $18-25k per year (based on Biologic analogues), I view the addressable market as the segment within the $4b opportunity (IBD) for a safe oral therapy - in the 40% of patients refractory to current treatments that could potentially displace biologics.
While it is difficult to estimate the exact penetration, simplistically, the Biologics class combined now currently sell $30b per year across the various indications. The market is essentially validating CNDO to the tune of ~1% of this opportunity at the current market cap. Again, given the transformative nature of the data as indicated above, and the upcoming catalyst from the TRUST trials expected to read out in 2H/13 (top line safety/efficacy in Crohn's) and full data in '14, I believe there may be considerable upside heading into this data.