A Public Apology To Adam Feuerstein On Northwest Biotherapeutics

A few months ago an interesting debate took place between Larry Smith, a retired biotech analyst who writes for Seeking Alpha as well as his own website, SmithonStocks.com and Adam Feuerstein who writes for the Street.Com regarding Northwest Biotherapeutics (NASDAQ:NWBO). Mr. Feuerstein basically called out the data from NWBO's phase i/ii trials and Mr. Smith rebutted the critique. In the comments section, I defended Mr. Smith and questioned Mr. Feuerstein's reasoning. Although I continue to believe that Mr. Smith was right with respect to the particular issue that formed the basis for their row, it has become apparent that NWBO is a horrific investment and that their technology is of questionable value.

Most biotech investors are aware of the Ratain/Feuerestein rule which basically holds that if a biotech company in a phase III trial has less than a $300 million market cap the odds are the trial will fail. The basic premise behind the rule is that if the trial were going well results would be leaking out. It's a tenet to the efficient market hypothesis. NWBO is currently conducting a phase III trial for Glioblastoma Multiforme or GBM. The trial is taking place in both the US and in Europe and looks to enroll 312 patients. The company has historically refused to reveal enrollment numbers but needless to say it has been a slow and torturous process spanning now close to a decade. The current market cap of the company is $117 million and over the last 9 months NWBO has sought financing for this trial as well as a new trial that they commenced in July, 2013. The first round of financing was underwritten by Aegis in December, 2012 whereby NWBO sold 3 million shares of common stock at $4 with 50% warrant coverage at $5. This funding was part of an up-listing plan initiated by the company allowing them to get off the Bulletin Board and on to the Nasdaq. Once concluded the deal was lauded by Mr. Smith who stated, "Raising money is not a bad thing for shareholders if it creates value."

Subsequent to the transaction with Aegis, the share price immediately fell below the deal price of $4 and finally settled around $3.50. Approximately 5 months after the Aegis deal, in April 2013, NWBO again sought to access the capital markets and this time, via an S1 they filed, hooked Sabby Management, one of 2013's most prolific pipe deal participants. This time the deal terms were $10 million worth of stock at $3.90 with 40% warrant coverage at $4.29.

The idea of investing is that as progress is made intrinsic value increases. Venture capitalist invest in the beginning with the hope that with good management and execution, the investment will grow such that each subsequent round of financing will come at incrementally better prices. Or in the words of Larry Smith, "raising money is not a bad thing for shareholders if it creates value." (italics added). After NWBO's deal with Sabby Management is was clear that NWBO was going in the wrong direction despite the company's claims of progress (prior to the deal with Sabby Management, NWBO put out a number of press releases outlining the company's achievements).

Less than 4 months after Sabby Management's deal with NWBO, a few weeks ago in August 2013, sold $15 million worth of stock to two institutional investors and as you may have guessed the price was once again lower than the last round. Although the investors were not disclosed the terms were-- $15 million of common stock were sold at $3.35 with 25% warrant coverage at $4. Moreover, the institutions were given an "over-allotment warrant" for additional $3.75 million exercisable for a year. Or in other words, they were given above and beyond their warrant coverage an option to buy up to an additional $3.75 million worth of stock at $3.35 for up to a year. Wow they were given warrants and warrants on top of warrants! Once again, for the third time in less than a year, NWBO engaged in a capital raise on terms more onerous than the last. Either the CEO is the worst negotiator in the world or what they are selling investors just are not buying.

It should also be noted that the company prior to the last raise changed accountants and converted a trade payable in the amount of $11 million to an affiliated party, Cognate Bioservices (the manufacturer of their vaccine), into restricted stock. Whether the institutions that took the last deal made these conditions to the deal has not been stated by the company but their proximity to the deal makes it apparent.

NWBO was burning approximately $5 million a month and as of the end of June 2013 they had less than $2 million in cash on hand. By the time of their last raise just 3 weeks ago, they were again in the red and per the company's 10Q needed a loan from an insider to get by. The $15 million they just raised will thus be gone in about 6 weeks (they were, by my calculation, in the red $3 million at the time of the raise and with their new trial their burn is now closer to $6 million a month. The August raise then of $15 million netted them about $12 million and with a burn of $6 million a month will get them through September). With another raise coming, the 4th in less than a year, each one at successively lower valuations, it is time to throw up my hands, admit defeat. and say to Adam Feuerstein... you were right, and I was wrong.

For those that are long the stock, however, I would not necessarily sell it down here. There are a number of "catalysts" coming up in the near future that should provide a nice exit point. Some of these catalysts would include the commencement of their Phase III trial in Germany, additional sites for their Phase i/ii trail and perhaps interim analysis on their Phase III trial expected before the end of the year. None of these are binary in the sense they will validate or refute the company's technology but they might provide information starved investors some reason to bid up the stock and provide those frustrated longs a chance to finally bid adieu.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in NWBO over 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.