(Editors' Note: This article covers a micro-cap stock. Please be aware of the risks associated with these stocks.)
After hitting the wires just days ago, one official news note from the biotech sector appears to have not yet been properly digested by the market.
Just days ago, CEL-SCI Corporation (NYSEMKT:CVM) announced that it has initiated an arbitration claim seeking at least $50 million in damages against inVentiv Clinical, LLC (f/k/a PharmaNet, LLC and PharmaNet GmbH (f/k/a PharmaNet AG))-- the same clinical research organization which CEL-SCI had initially retained to conduct the Phase III Clinical Trial of their investigational drug Multikine (Leukocyte Interleukin, Injection), in a pivotal global trial involving head and neck cancer.
CEL-SCI terminated inVentiv in April 2013 announcing via an "Update on the Phase III Clinical Trial" that it had replaced the slowly executing CRO, with two new clinical research organizations, Aptiv Solutions, Inc. and Ergomed Clinical Research Ltd.
According to the official news release, CEL-SCI's arbitration claim is initiated under the Commercial Rules of the American Arbitration Association alleging (I) breach of contract, (ii) fraud in the inducement, and (III) common law fraud, and seeks at least $50 million in damages.
From what we gather using public information and filings, after years leading the charge, the original CRO had only enrolled 117 patients at 39 sites in 8 countries, including three centers in Israel where CEL-SCI's partner Teva Pharmaceuticals (NYSE:TEVA) has the marketing rights, and nine centers in Taiwan where the company's partner Orient Europhama has the marketing rights.
That pace hurt the credibility of Cel-Sci and drew loud criticism and blame from long-time investors. They placed blame directly on to CEO Geert Kersten, who has served in his current leadership role at CEL-SCI since 1995.
Wall Street seems to buy and believe in CEL-SCI's science and drug candidates, but some also feel that the firm has taken far too long in getting them to the promised land. Glancing through some of the commentary around social media sites, this legal news barely caused a blip on the radar screen.
The possibility that CEL-SCI's market cap could be greatly impacted if they are awarded even half of the $50 million+ they seek in damages is worthy of attention from traders and speculators who like litigation plays like last year's Vringo (NASDAQ:VRNG) -- which successfully sought court claims against Google (NASDAQ:GOOG) and let some investors walk away with profits.
This arbitration case is most likely to avoid all the dramatic twists and turns inherent in patent litigation and could be settled much more quickly.
Currently trading at discounted rates following a recent dilutive financing. We see a firm with a market cap of around $40 million and with cash levels near $17 million. A settlement here could boost CEL-SCI's share values significantly if it were to successfully prove and be awarded even half of the $50 million+ being sought by the company.
People forget that Mr. Kersten has been with CEL-SCI from the early days of its inception (since 1987) and while he has gained some recognition for pioneering the field of cancer immunotherapy during those decades, Kersten also provides CEL-SCI with significant expertise in the fields of finance and law. Prior to CEL-SCI, Mr. Kersten worked at the law firm of Finley & Kumble.
Never one to back away from criticism, it seems more and more that lately the confident Kersten has been actively disarming critics by acting to remove some of the strongest concerns raised by his investors.
The Virginia based biotech which has been working for decades on improving the treatment of cancer and other diseases by utilizing the body's own natural defense system through its lead investigational therapy-- Multikine, has recently and in rapid succession announced additional human clinical studies which should yield results rather quickly and show even some of the firm's most cynical critics whether the leading drug candidate has the potential to be the wonder drug it has promised it can be or not.
One of those new studies is in HIV/HPV co-infected men and women with peri-anal warts, a second in which CEL-SCI has also recently entered via a Cooperative Research and Development Agreement (CRADA) for the same disease indication with the US Naval Medical Center, San Diego, and a third involving HIV/HPV co-infected women with cervical dysplasia.
Kersten has also signaled to the market that he heard their concerns about the slow enrollment process for the pivotal Phase III trial by hiring two new clinical research organizations to manage the global Phase III study more actively. Those two firms, Aptiv Solutions and Ergomed are both international leaders in managing oncology trials and both CRO's are helping the Company expand the trial by 60-80 clinical sites globally. Given that a total of approximately 880 patients are expected to be enrolled in this international Phase III study, once can see why the 117 patients which had been enrolled by inVentiv Clinical, LLC before they were released may have easily been "too slow and unacceptable."
The fact that Kersten took over six months to finally initiate the $50 Million+ arbitration claim is telling as well. Either the original CRO did the study the way they said they would or they didn't. Given the allegations of breach of contract, fraud in the inducement, and common law fraud there likely exists some clear evidence gathered with a great deal of preparation by "lawyer Kersten" and his team.
Unlike the Vringo case which caused so much excitement among speculators, this is also an arbitration case which is binding and means the participants must follow the arbitrator's decision and courts will enforce it.
In short, we are likely to see a very quick decision and settlement here. Arbitration is usually faster, simpler, more efficient, and more flexible for scheduling than litigation, plus it is unlikely that the defendant, one of the largest clinical research organizations in medicine, will want competing CROs to bring up ugly details about the CEL-SCI case each time they are bidding for new contracts.
One is left to wonder about inVentiv, a leading global supplier of drug development services, could they not help CEL-SCI execute their study in a the type of efficient fashion described on their own website which touts their firm as a world class operation:
"For Phase IIb - III clinical trials we offer a full range of services including biostatistics, data management, project management, study monitoring, patient recruitment, and global safety and pharmacovigilance. Our expertise in oncology, cardiology, neuroscience, infectious disease, and other therapeutic areas ensure that our project team professionally executes your program. Our exclusive access to UnitedHealth Care claims data allows you to have real-time, robust insight into the right patient populations and investigators. We will then consult with you to apply the data and develop a protocol for an efficient, safe and cost effective study."
At least where CEL-SCI is concerned, investors never saw the expected progress on the Phase III clinical trial, particularly in regards to patient enrollment and that has had a severely negative impact on not only CVM shares but also on Kersten's credibility, despite the fact the he went after and hired what appeared to be a best-in-breed, leading CRO.
The fact that inVentive managed to only enroll 117 patients including those provided by CEL-SCI's own partners would suggest that the CRO's performance was deficient and gives credence to the arbitration claims.
Recent updates from the company point to more Investigator Meetings and upcoming news catalysts surrounding a more rapid expansion of the Multikine Phase III study, which is enrolling patients with advanced primary, not yet treated, head and neck cancer.
About 6% of all cancers are head and neck cancer with an estimated 650,000 new cases globally and about 150,000 in the U.S. and Europe. The objective of the study is to demonstrate a statistically significant 10% improvement in overall survival of enrolled patients who are treated with the investigational therapy Multikine plus Standard of Care (SOC) vs. subjects who are treated with SOC only. Multikine is intended to create an anti-tumor immune response to reduce local / regional tumor recurrence and thereby increase the survival of these patients.
Should Multikine treatment plus SOC prove to be successful in demonstrating a statistically significant overall survival advantage in the Phase III study, and following the FDA review of the totality of the Multikine development program, Multikine plus the current standard of care treatment, following an anticipated marketing approval from the FDA, could then become part of the new standard of care treatment in this indication. That would represent a multibillion dollar market. The U.S. Food and Drug Administration (FDA) has already granted orphan drug designation to Multikine in the treatment of advanced primary head and neck cancer.
A quick cash settlement or outright victory of the $50 Million+ in damages being sought by CEL-SCI would go a long way towards funding and completion of that Phase III study. Depending on the size of the award, it may altogether do away with any further dilution from future capital raises by the firm.
This would also not be the first time a CRO was forced to pay tens of millions to settle a dispute like this one.
In 2003, the ILEX Oncology paid $16.5 million to settle a dispute with a former contract research organization client after they had previously announced its intention to exit the CRO business.
At the time, ILEX issued a statement saying the company did not believe that ILEX Services was liable for the "significant damages being claimed," but decided to settle to avoid the prolonged uncertainty that such a time-consuming dispute would cause so as not to distract from the company's primary focus. A year later, ILEX was acquired by Genzyme Corporation for $1 billion in stock.
The trade proposition here is simple: Is it clear enough that there could be a substantial cash settlement for this case? Solid proof may lie in the weak enrollment statistics which are public knowledge.
The fact is, inVentive managed to sign up only 117 out of 880 patients in 3 years. Is that acceptable for a CRO with a best in-class team featuring 12,000 employees in 40 countries? At that rate, the Phase III study would have taken well over 15 years to complete.
If one agrees in finding that type of performance to be unreasonable, then perhaps CEL-SCI really does have a case going into this arbitration proceeding.