A few truisms about capitalism and the stock market:
- The point of a company is to make money.
- The point of having a stock market is to raise money for a company from the public who will then share in a company's profits or losses.
- Some companies are better than others at getting people to give them money.
- At the end of the day, regardless of how good a company is at getting the public to give it money, investors will make or lose money in proportion to how much money the company makes or loses.
With that in mind, here are two oncology companies: Onyx Pharmaceuticals (ONXX) and Northwest Biotherapeutics (NWBO). In some ways the two are night and day. In others, they are very similar. Onyx has been excellent at getting other entities to give it money and buy its stock. It is consistently well capitalized and currently has $323M in cash and total current assets of over $1B. Northwest has been consistently bad at getting other people to give it money and currently has $373K in cash and total current assets of $412K. That's 4 X 10-4 times the capital of Onyx, or .0004%. Onyx has a market capitalization of $9.3B. NWBO has $104M, about 1% of that.
That's one way to look at it. The other is to count how much money each company has actually made, or in this case, lost. Northwest has an accumulated deficit of $333.5M. Onyx has an accumulated deficit of more than twice that at $738M. Taken that way, and though investors of both companies can't exactly feel it in their brokerage accounts, Northwest has been a more efficient company than Onyx.
Think of it this way: Neither company makes money. Both list and have listed consistent quarterly losses. Most recently, Onyx posted a $53M loss, Northwest $14M. In the most basic sense, both companies need other entities to give them money in exchange for expectations in order to exist, and Onyx has used up $738M of this money, Northwest $333.5M. The only reason Onyx investors are much happier than Northwest investors even though more investor money has been burned by Onyx is that many more entities have forked over much more money for Onyx than Northwest, making Onyx's stock skyrocket and Northwest's to stagnate.
Of course, there's a reason for this. The biggest one is the reported bidding war for Onyx by several different and very large companies with lots and lots of money. They are interested in Kyprolis, a recently approved multiple myeloma drug estimated to bring in close to $3B in revenue (see link above) by 2022.
Almost nobody is interested in Northwest. There's a reason for this, too. It has been 7 years since the start of a Phase III glioblastoma multiforme [GBM] trial for DCVax-L that has still not completed enrollment and topline results keep getting pushed off, currently estimated for the end of 2014. After a few years, investors start asking questions and then start selling their NWBO shares.
What's the hold up? There are many, but if you look at the inclusion criteria for the DCVax-L trial, you'll see that they are very narrow, including a restriction against using any kind of chemotherapy except one (temozolomide) for all trial participants coupled with a placebo arm, double blinded, and the fact that GBM typically kills within 3 months of diagnosis. Add that all together with the fact that there is intense competition for GBM trial participants in the U.S. where incidence is 2 per 100,000, and you have the criteria for a very difficult recruitment indeed. Even after recruitment is completed, investors will still have to wait months for progression free survival data to maintain the double blinding.
To make matters worse, nobody even knows if the FDA will require it to do a confirmatory Phase III after this first one is completed, something Northwest cannot afford given its meager resources. Nevertheless, most investors who show any sort of interest in the company usually focus on this DCVax-L given that it is in Phase III. But given the company's cash position and this trial's persistent habit of lingering on and on, I believe that if salvation comes for Northwest, it will come from something else: the DCVax-Direct Phase I/II trial currently underway.
Before I get into what DCVax-Direct is and why it is so important, first a bit more on Kyprolis.
Kyprolis' Accelerated FDA approval
Kyprolis, the drug that has sparked a bidding war over Onyx and rewarded shareholders with 178% gains since rumors of its impending approval started in June 2012, was approved without even ever holding a Phase III trial. It was granted accelerated approval after a Phase IIB study assessing tumor response, with no data yet even available on progression free survival or overall survival. The study that won its approval was open label, no blinding, no placebo. Approval was won on the basis of an overall response rate of 23 percent with a median duration of response of 7.8 months. These are the results that made so many ONXX holders rich, and likely even richer in the near future when the bidding war is finally settled.
DCVax-Direct is Northwest's pipeline product for the treatment of all solid inoperable tumor cancers. It works by training a patient's dendritic immune cells to pick up cancer markers in vivo and attack them, generating a systemic immune response and immune memory. So far we have nothing but preclinical data on mice. Tumors treated with a direct injection of DCVax-Direct showed complete regression of all tumors in 80% of the animals injected, tumors that did not regrow once reinjected. Very exciting, but still, mice aren't humans.
DCVax-Direct's Phase I/II trial was put together very quickly. It was first received by the FDA in June and is already enrolling. Unlike DCVax-L, there is no placebo arm and there is no blinding, so there is no need to wait for completion of enrollment for results. Unlike DCVax-L, there will be no need to test for progression free or overall survival, as the primary endpoint is tumor regression which either happens quickly or doesn't happen at all. There is also no need to compete for the razor thin market of GBM patients willing to forego chemotherapy, as DCVax-Direct will enroll patients with almost any inoperable tumor. In many ways, the DCVax-Direct Phase I/II trial is structured very much like the Phase II that led to the approval of Kyprolis. Northwest is avoiding the DCVax-L trial design like the plague, and for good reason.
One could conceivably ask why a company so short on cash with an expensive Phase III ongoing in two continents would suddenly spend precious resources putting together another Phase II trial for a new candidate. I believe this is the answer. Northwest knows that investors are getting antsy and it is running out of time.
In the end, what gives a company value is not how much money it can convince others to give it. It's how much money the company actually makes. As soon as the bidding war is over for Onyx and the sales picture for Kyprolis becomes clearer, ONXX will settle at some market equilibrium price in accordance with how much money it actually makes.
Northwest may not be very good at convincing others to give it money. But so far, share price and market cap notwithstanding, it has been a better steward of the money given to it over the years than Onyx.
Both companies issue shares -- they essentially dilute -- to capitalize. Onyx gets cheered for being responsible because more people buy them and shares are up, and Northwest gets yelled at for sticking it to their investors because less people buy them and shares are down. But we'll see what happens to Northwest Biotherapeutics when DCVax-Direct results start coming in this year. Then we'll see what the FDA says once the 60-patient trial is completed. And if it is approved and Northwest actually brings it to market, we'll see which company actually makes more money.