[Editors' Note: This article covers a micro-cap stock. Please be aware of the risks associated with these stocks.]
Following a transformational 2013 which saw the stock jump from $0.04 to $0.22 only to settle in the $0.13 range, controversial biotech stock Nuvilex, Inc. (OTCQB:NVLX) is presently undervalued and is set to make big operational strides and achieve major stock price gains in 2014. In fact, given its diversified business model, it could be argued that the risk profile for Nuvilex is lower than some biotechs that trade on NASDAQ and at higher valuations. Moreover, given its potential, the stock might trade at higher valuations if it traded on NASDAQ rather than the over-the-counter market.
The View From 30,000 Feet
Most NASDAQ-traded biotech stocks that carry a sub-$85 million market cap (such as the one afforded Nuvilex) are one-product companies with a single treatment market opportunity that have only completed Phase 1 clinical trials and have a small pre-clinical portfolio. Nuvilex owns exclusive rights to a cancer treatment platform that has successfully completed Phase 2 clinical trials for inoperable pancreatic cancer, owns rights to the same platform to treat diabetes, and has a medical marijuana subsidiary slated to begin cancer research and development using cannabidiol. With each of the key target markets representing multi-billion-dollar opportunities, Nuvilex offers investors multiple opportunities for success and should trade at a much higher valuation which reflects its current development progress to date.
Clearly, raising the funds necessary to initiate future, advanced clinical trials will be a critical and difficult task. However, over the past few months, the company has successfully raised $3.0 million (in two $1.5 million tranches) that were at premiums to the prevailing stock price with negligible dilution to shareholders. These events are unheard of for a microcap company. Separately, the company successfully reduced its debt by $2.2 million, thus strengthening the balance sheet further. With these transactions in hand, and the strength of the technology, it is likely that Nuvilex may have an easier time raising funds than its peers, especially as the company achieves important milestones in 2014.
Step #1: New Market
In mid-February, the stock began to get on investors' radar screens following a filing and announcement that Nuvilex had established a wholly-owned subsidiary called Medical Marijuana Sciences, Inc., (MMS) with the objective of conducting research and development for the treatment of diseases using compounds derived from the plant Cannabis sativa. The company did not make any material steps in this segment until late 2013, but the stock began to pick up steam with the start of an investor outreach campaign earlier in the year that coincided with a big upswing in the medical marijuana stock space. Since this announcement, the company has come under fire for being opportunistic rather than proactive in this nascent arena.
However, late last week, Nuvilex made great strides in this segment which bodes well for shareholders and should silence the negative rhetoric.
The company announced that Dr. Mark Rabe, a leading figure in the emerging medical marijuana field, has joined MMS as Chairman of its Scientific Advisory Board. Dr. Rabe was formerly the Chief Medical Officer of California's largest network of physician-owned medical cannabis evaluation centers where he hired and trained medical personnel, conducted research and supervised the recommendation of medical cannabis to over 100,000 patients in 20 clinics across California. This is a huge "get" for the company and will jump-start the development of cancer treatments using cannabidiol.
Step #2: Critical and Valuable Acquisition
In mid-July 2013, Nuvilex finally closed a long-awaited cancer treatment platform technology acquisition. Nuvilex acquired 100% interest in Bio Blue Bird AG, which owned the rights to a cellulose-based, live-cell encapsulation platform called Cell-in-a-Box which was developed by SG Austria, for $1.5 million. The company paid for the exclusive worldwide rights to use the technology for all cancers, and also acquired a 14.5% ownership stake in SG as well.
A few years earlier, SG Austria successfully completed Phase 2 clinical trials for the Cell-in-a-Box technology to treat inoperable pancreatic cancer, illustrating the tremendous potential value of the platform. It should be noted that fewer than 20% of all treatments that enter clinical trials successfully complete Phase 2 and initiate a Phase 3 trial. Pending Phase 3 funding success, this would place Nuvilex in exclusive company.
Pancreatic cancer is one of the deadliest forms of cancer, often going undetected, then terminal once discovered. In the U.S. alone, it is responsible for over 38,000 deaths annually. Gemzar (gemcitabine), produced by Eli Lilly (NYSE:LLY), is the current FDA-approved standard of care as a single agent for pancreatic cancer and has provided Eli Lilly with about $10 billion in revenue annually. Celgene (NASDAQ:CELG) was recently awarded FDA approval for its pancreatic cancer treatment despite demonstrating only an incremental increase in median survival time and one-year survival rate compared to gemcitabine, when its drug Abraxane was used in conjunction with gemcitabine.
Gemcitabine is a member of a group of chemotherapy drugs known as anti-metabolites. The drug prevents cells from making DNA and RNA, which stops cell growth and causes the cells to die. In comparison, the live-cell encapsulation technology used in Nuvilex's pancreatic cancer treatment works to protect and maintain living drug-activating cells in close proximity to the cancer and serves to optimize the cancer-killing effect of the well-known cancer drug ifosfamide when both are used in combination. In addition to its efficacy against the primary tumor, the live-cell encapsulation/ifosfamide combination treatment may also have significant effects against pancreatic tumor cells that have migrated to the liver where they can form new tumors.
The data from clinical trials for Nuvilex's (or SG Austria's) pancreatic cancer treatment technology demonstrated an average survival of 44 weeks versus 28 weeks for Gemzar and 36% 1-year survival rate versus 18% as well. Basically, the live-cell encapsulation technology from Nuvilex, in combination with ifosfamide, has demonstrated to be nearly twice as effective as Gemzar in clinical trials. Finally, these beneficial effects of Nuvilex's pancreatic cancer treatment were accompanied by no treatment-associated side effects; this is not the case with Gemzar as its use can be accompanied by very severe side effects.
These great treatments are substantially better than the two approved treatments, and were highlighted in medical journals and well-regarded publications. However, since these trials were conducted several years ago in Europe and had a small sampling of 14 subjects, some naysayers believe that a larger trial would be needed to truly confirm the previous results. Management agrees and has taken several steps in recent months including the commencement of the cloning of its cancer drug-activating cells to build the proper inventory for a large-scale advanced trial as well as the build-out of a GMP (Good Manufacturing Practices) facility. The closing of these events are likely FDA prerequisites prior to the start of such a trial.
Step #3: Diabetes Platform
As if the multi-billion dollar cancer treatment opportunity was not enough, last month, Nuvilex acquired the exclusive worldwide rights to use the cellulose-based live-cell encapsulation technology for the development of treatments for diabetes from SG Austria for $1.5 million. Once again, funds were raised at a premium to the market (10 million shares @ $0.15 per share). One million dollars of the funds were to be used for the acquisition while $500,000 is to be used for ongoing preparations for Nuvilex's Phase 3 clinical trials in pancreatic cancer.
According to the company press release:
Nuvilex's decision to make the acquisition stems, in large part, from the results of "proof-of-principle" studies in which cells that produce insulin were transplanted into diabetic animals. The diabetic animals had much higher than normal levels of glucose in their bloodstream and had a difficult time controlling their glucose levels, just as humans with diabetes do. In animals provided with the encapsulated cells, their blood glucose levels normalized and remained stable for the duration of one six-month study, indicating the encapsulated cells produced insulin in response to their higher than normal blood glucose levels. The cellulose-based capsules seem to have prevented the encapsulated cells from being attacked by the diabetic animals' immune systems, even in the absence of immunosuppressive drugs. Therefore, the encapsulated cells appear to have acted as an artificial or replacement pancreas.
In other words, the company's treatment could lead to the elimination of daily insulin injections.
Liquidity is always a risk for stocks that trade in the over-the-counter market. Moreover, since early-mid stage biotech stocks must continuously raise cash to fund expensive R&D, potential dilution is typically in the offing. Moreover, biotech stocks are event-driven and milestone-driven equities, which mean that there can be swings in the stock value, in the absence of news. It has been suggested by many Nuvilex watchers that the stock has tens of millions of shares short and while it is virtually impossible to verify short positions in low-priced OTC stocks, it does appear that there may be a meaningful short position, judging by how it trades with big spikes lower at odd times. This is likely due to the controversial nature of the stock. It is a biotech that prior to the past six months did not have a lot going for it and today it is on the cusp of joining the next tier of biotechs. Interestingly, Nuvilex might even trade at a much higher valuation if it were going public today, given its IP ownership, diversified treatment market opportunities and the wild card potential of the medical marijuana segment. Therefore, I do not believe the maturing company's stock carries much greater risk than any other mid-stage biotech story.
As I noted above, biotechs trade on news or events/milestones, and 2014 should be milestones aplenty for Nuvilex following the formation of its go-forward model in 2013. These include the GMP facility construction, cloning completion, and typical steps associated with pre-Phase 3 trial protocol design and commencement such as pre-IND meetings with the FDA. Other milestones could include development progress on the diabetes side as well as research and development on the use of its flagship platform to treat breast cancer. Considering it is easier to treat than pancreatic cancer, R&D success in this category holds meaningful progress and the company already has a great deal of animal studies data.
When milestones are reached, stocks' valuations rise. Oncology stocks that are pre-Phase 3 such as Threshold Pharmaceuticals (NASDAQ:THLD) tend to trade at valuations in the $200 million range or more and I believe that Nuvilex is on that path and will reach it as it achieves development milestones, and overcomes the naysayers, next year.
Controversy creates opportunity for savvy investors willing to overlook baseless rhetoric that is founded in the past rather than the future. The Nuvilex of today owns valuable IP that will likely lead to a Phase 3 clinical trial for inoperable pancreatic cancer, the development of other cancer treatments and a treatment for diabetes that could eliminate the need for daily insulin injections. The medical marijuana subsidiary holds promise but is a wild card or potential bonus given its early stage. Nonetheless, the stock trades at a low valuation relative to its progress along the development food chain and I believe that once future milestones are reached, the stock could triple.