Coronado Biosciences: A Massive Bear Trap In The Making

| About: Fortress Biotech, (FBIO)

Coronado Biosciences (CNDO) is a development stage biotech company that is currently in the process of conducting clinical trials for its two main drug candidates aiming to treat autoimmune diseases and cancer. As a result of these 2 candidates already showing potency over a broad range of therapeutic applications, the company has aggressively moved forward and initiated 6 clinical trials and 4 additional planned trials aiming to treat several major disease areas. Although CNDO is surely looking to be a major player in the pharmaceutical space if these trials progress well, a large amount of short interest has amassed against the company since January of this year. While in the beginning of the year short interest on CNDO was a mere 504,545, that amount has shot up over 5.7x to a current short interest of 2,919,458 shares sold short. While there is clearly a high short interest out on CDNO at the moment, what becomes undeniably clear immediately upon taking an in depth look at the company are 3 things: 1) CNDO's drug candidates have shown to be highly effective and safe thus far. 2) Insiders, institutions and analysts are extremely bullish on the company, and 3) If CNDO's near term catalysts are positive, short sellers will likely find themselves deep underwater.

The Science

CNDO's main drug candidate CNDO-201 (((TSO))) was originally discovered by gastroenterologist's at the University of Iowa specializing in the fields of Crohn's Disease and Ulcerative Colitis. Their reasoning on why CNDO-201 is likely a potential potent treatment for autoimmune disease is what they refer to as the "hygiene hypothesis". The theory is based on the concept that as humans evolved on the planet over the past 200,000 years our immune systems have constantly encountered and needed to fight off harmful bacteria, parasites and viruses. This part of the hygiene hypothesis is of course not debatable. The theory however that the hygiene hypothesis proposes next is that as a result of current modern civilized lifestyles which deprive many humans from contact with nature and its many microscopic living organisms, our immune systems do not encounter as many foreign bacteria to fight, but are still programmed to defend our bodies as if these invaders were present. In turn, patients with autoimmune diseases are believed to be experiencing their immune systems attacking themselves due to the fact that the immune system is programmed to attack by evolution and assumes that harmful organisms are still encountered by the body as they've always been throughout history.

By introducing CNDO's drug candidate CDNO-201 into the body, which is actually a group of microscopic parasites, scientists and CNDO believe that the immune system will redirect its efforts against it's own cells and towards the actual parasites and pathogens it is supposed to be fighting in the first place. While a final conclusion on weather CNDO-201 will receive final approval or not won't be known until the last phase of clinical trials are complete, what's been shown thus far is that the treatment is both effective and safe when tested on patients with Crohn's and Ulcerative Colitis.

Major Multi Billion Dollar Market Potential

CNDO's lead candidate CNDO-201(((TSO))) sits to enter a near term market of $10.3B in just its top 3 trials for Crohn's, Ulcerative Colitis and Multiple Sclerosis. The company is projecting to have interim results for it's 2 ongoing Crohn's Phase II studies in the 2nd half of this year. Since CNDO-201 trials have started with a standard autoimmune disease such as Crohn's, one can infer with a high degree of confidence that if the treatment is effective for patients with Crohn's it will in turn be effective in treating a wide variety of auto-immune diseases due the common foundational problem they share of the immune system lacking direction. Below is the specific market size each of CNDO's top 3 trials sit to enter.

When adding to this $10.3B figure the 5 additional disease markets CNDO-201 is currently undergoing clinical trials for, this market size grows to an estimated $42.7B ($32.4B+$10.3B).

Disease Market

Autism $400M
Psoriasis $2B
Arthritis $20B
Type-1 Diabetes $10B
Crohn's+Ulcerative Colitis+MS $10.3B
Total CNDO-201 Market = $42.7B

While CNDO-201(((TSO))) clearly shows an opportunity to generate massive revenues if it continues to show efficacy and safety, the company's 2nd drug CNDO-109, currently being studied for Acute Myeloid Leukemia and Multiple Myeloma, is also a potential blockbuster drug currently under the radar. CNDO-109 is an activator of natural killer cells that works by exposing NK cells to tumor extracts and aiming to direct these NK cells towards the patients specific tumor. Positive pre-clinical activity of CNDO-109 has already been demonstrated in research on breast cancer, prostate cancer and ovarian cancer. As well the company is currently conducting a Phase I/II trial for Acute Myeloid Leukemia. Similar to CNDO-201, CDNO has retained patent licenses for this drug which put the company in a strong intellectual property position for it's treatment until 2029 in the US. The overall potential markets which CNDO-109's current pipeline is sitting to enter is $3B+. When the pre-clinical markets for Breast Cancer, Prostate Cancer and Ovarian Cancer are added, this figure becomes approximately $17.5B ($3B+$14.5B).


Acute Myeloid Leukemia $165M
Multiple Myeloma $2.87B
Breast Cancer $10.1B
Ovarian Cancer $424M
Prostate Cancer $4B
Total CNDO-109 Market = $17.5B

Cash Position

CNDO's cash position at the end of March 31, 2013 was $44.1M. Considering the company's quarterly burn rate is between $8M-$9M per quarter, I consider this to put CNDO in a particularly strong stance to move forward with its current clinical trials and business operations. In past negative CNDO articles short sellers have zoomed in on an S3 shelf registration filed by the company enabling them to raise $70M through the issuing of new stock. What these critics fail to comprehend however is that this is a standard strategic move which nearly all development biotech's initiate in order to protect themselves. I would be more concerned if the company did not have this shelf registration out because by filing this S3, CNDO now has a large amount of capital set aside to tap into if it winds up needing further capital to progress into Phase III trials. If shorting CNDO based on the company's filing of an S3 was a valid argument then one could get away with making a case to short any development stage biotech company.

Analysts, Insiders and The JNJ Connection

Currently 4 analysts list CNDO as a "Strong Buy", 3 analysts list CNDO as a "Buy" and 0 analysts have CNDO as a sell, underperform or hold. The price targets for CNDO are as follows:

Mean Target $16.79

Median Target

High Target $24.00
Low Target $12.00
# of analysts 7

Along with CNDO's attracting several bullish analysts, CNDO management has shown their own bullishness in terms of insider buying. Since 1/17/2012, according to the SEC not 1 insider has sold stock in CNDO and 8 insiders have purchased shares on the open market. While CNDO appears to be looking to take its pipeline to market on its own, a future partnership or buyout should not be considered out of the question. If a partnership or buyout were to take place the clear company likely to be eyeing CNDO is Johnson and Johnson (NYSE:JNJ). Along with CNDO's CEO Dr. Weisman's being the past president of JNJ's Research and Development Team, CNDO's Chief Medical Officer Dr. Hehenberger is also a past JNJ executive who acted as JNJ's Vice President of Metabolic strategy and Business Development. Yet if that wasn't enough of a connection, further interesting is the fact that CNDO's biggest shareholder Dr. Lindsay Rosenwald, who is also on the company's board of directors, has previously sold his own pharmaceutical company Cougar Biotech to JNJ just 4 years ago for the tune of $1B.


While the bull case for CNDO appears to be a clear cut one, bears who are short CNDO such as The Street Sweeper and Mark Gomez have tried their best to make cases as to why they have shorted the company. The Street Sweeper's points are that 1) the company could dilute shareholders 2) 1 past executive and 1 current board member have been involved in companies which had problems in the past, and 3) There are competitors also looking to enter CNDO's disease markets. In my opinion these are all TERRIBLE reasons to short CNDO, or any company for that matter. 1) As I have discussed, nearly all development stage biotech's have an S3 filed as a responsible housekeeping measure. Not having an S3 filed would be more of a valid argument to short. 2) If you look into any public company you will find an employee and/or board member who has not had a flawless past, what's more important is the overall picture, and 3) Competition is a fact of life! Did you think this was Monopoly?! While the street sweeper has at the very least brought to the table her own ideas (illogical as I may find them), Mark Gomez shockingly admits that he shorted CNDO immediately after reading the street sweepers original article, basing his short position solely on her opinion! Mr. Gomez states in his article,"The account was so compelling, I immediately shorted the stock." To add more ridiculousness to this action Mr. Gomez in his article acknowledges that he is not an expert in the biotech field, but rather specializes in technology. I don't think I need to comment any further on this. In summation, the case for CNDO as a solid long term buy and an extremely horrible short should be apparent. If CNDO's clinical trials continue to show efficacy and safety as they have done in past studies, this short party is likely due to become an explosive short squeeze.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.